Status
The United States has no income tax treaty with Hong Kong, and the U.S.-China treaty does not apply there: the Treasury technical explanation of the China treaty says it does not cover Hong Kong. Payments to Hong Kong residents are withheld under the Code with no treaty reduction. The two governments have a tax information exchange agreement, which Treasury lists with the date March 25, 2014.
What to withhold
- U.S.-source fixed or determinable income (dividends, royalties, rents, interest that is not otherwise exempt, pay for services performed in the United States) is withheld on at 30% of the gross payment.
- The Code's own exemptions still apply: portfolio interest, bank deposit interest, and income effectively connected with a U.S. trade or business documented on Form W-8ECI.
- Pay for services performed entirely outside the United States is foreign-source: no withholding and no Form 1042-S.
- A W-8BEN or W-8BEN-E that claims treaty benefits for Hong Kong cannot be relied on for the claim, but still documents foreign status. A nonresident working in the U.S. has no treaty exemption to claim on Form 8233.
- Payments are reported on Form 1042-S with the payee's country code, whether or not tax was withheld.
The information exchange agreement
A tax information exchange agreement lets the IRS and the other jurisdiction's tax authority ask each other for, and share, information needed to enforce their own tax laws. It is not an income tax treaty: it sets no withholding rates, has no residence, permanent establishment or business profits rules, and gives a payee nothing to claim on a W-8BEN or W-8BEN-E. The Hong Kong agreement covers U.S. federal income, employment, estate and gift and excise taxes, and Hong Kong profits tax, salaries tax and property tax. It provides for exchange on request only, with no automatic or spontaneous exchange, and expressly reaches bank and ownership information. Its protocol confirms that Hong Kong's port area at Shenzhen Bay is within Hong Kong's jurisdiction.
Where payers go wrong
- Accepting a China treaty claim from a Hong Kong company. A W-8BEN-E from a Hong Kong entity claiming the U.S.-China rate cannot be relied on. The China page explains the exclusion.
- Treating a Hong Kong regional hub as treaty-protected. Royalties for use of software or other property in the U.S., and dividends from a U.S. subsidiary, are withheld at 30%.
- Withholding on pay for work done in Hong Kong. Services performed outside the U.S. are foreign-source, treaty or not.
Documents
Questions payers ask
Does the U.S.-China tax treaty apply to Hong Kong?
No. The Treasury technical explanation of the U.S.-China treaty says it does not apply to Hong Kong. A Hong Kong resident cannot claim the China treaty rates.
What is the U.S. withholding rate on dividends paid to a Hong Kong company?
30%, because there is no treaty. The rate applies to the gross dividend.
Is interest paid to a Hong Kong lender subject to withholding?
Not if it qualifies as portfolio interest or bank deposit interest under the Code; those exemptions do not depend on a treaty. Other U.S.-source interest is withheld at 30%.