Do you have to pay tax on dividends in Hong Kong? Company Dividend vs Individual Dividend Conditions, Procedures and Tax Exemptions in one article.
Dividends in Hong Kong are after-tax distributions and are generally not subject to tax for individuals and corporations. However, cross-border investments or misstatement of expenses still require attention to tax risks.
Summary of key points
- Dividend is the return on a company's after-tax earnings distributed to shareholders in proportion to their shareholdings.
- Hong Kong adopts territorial source taxation and dividends are distributed after tax and are generally not subject to double taxation.
- Dividends from Hong Kong stocks received by individuals or companies are generally tax-free, except for professional traders.
- Misclassifying dividend payments as tax deductions or omitting to report overseas dividends may result in back tax penalties.
- Review financial statements, maintain documentation and consult accounting advisors before paying dividends
What is a dividend?
Dividend is the return on a company's earnings, after operating costs and taxes, distributed to shareholders in proportion to their shareholdings.
Dividend distribution mechanism after the company has made profits
Normally, when a company is operating at a surplus and has a stable capital position, the board of directors may decide to pay a dividend to enable shareholders to enjoy a return.
Dividends may be in the form of cash, shares or other assets, subject to the provisions of the law and the Company's Articles of Association.
Dividend vs Bonus
Although "dividend" and "bonus" are often used interchangeably in everyday language, they are not identical at the accounting and tax level.
- dividendUsually in the form ofCashPeriodic (e.g. annual or semi-annual) payments to shareholders.
- Bonus Shares / Scrip DividendIt may be based onadditional sharesIn addition to the above, the Government will also provide returns in the form of stock appreciation, capital revaluation, etc. The Government will also provide returns in the form of equity and capital surplus.
Under Hong Kong's tax system, both are "investment returns" rather than "operating income".Not regarded as taxable income。
Conditions and Procedures for Payment of Dividends by Hong Kong Companies
Basic Principles of Dividend Taxation in Hong Kong
Hong Kong adopts thePrinciple of Geographical Origin"As a result, only "profits arising in or derived from Hong Kong" are taxable under the Territorial Principle.
Although the company's profits are subject toprofits tax(Profits Tax), but after-tax dividends paid to shareholders.Distributions which are post-tax and will not be re-taxedThis is one of the key reasons why Hong Kong has become a regional financial centre and investment hub. This is one of the key reasons why Hong Kong has become a regional financial centre and investment hub.
Legal conditions for dividend payment (board resolution, distributable earnings)
In order to legally pay a company dividend, a company must fulfil the following core conditions:
- The Board of Directors resolved to approve the dividend(may be retained through minutes or resolution papers)
- Distributable earnings in the company's accounts(i.e. net profit after corporate income tax)
- Dividends may not be capitalisedIf this is not the case, it will be a breach of the Ordinance.Companies Ordinance》
- Shareholders' meeting confirms distribution proposal(Depending on the company's needs, not necessarily required)
Process and Document Retention Requirements
The complete dividend payout process is as follows:
- Financial Audit ((Ensure that the company has distributable earnings)
- Resolution of the Board of Directors ((Recorded in the minutes of the meeting, detailing the amount, timing and basis of calculation of the distribution)
- Issuance of Dividend Notification(Dividend Voucher)
- Payment of dividends ((Payments to shareholders)
- Documentation preservation (Keeping of board resolutions, books of accounts, records of dividend payments, etc.At least 7 years(for inspection by the Inland Revenue Department (IRD) or for auditing purposes)
Are dividends taxable in Hong Kong? Individual vs Company
Are individual shareholders subject to tax?
Individual investors who receive dividends from Hong Kong stocks or Hong Kong companies are not subject to additional tax and are not required to file personal income tax returns.
However, if you are trading as a "professional trader" or "securities trading business", the dividends may be treated as business income and taxed as profits.
| Shareholder Status | source of dividends | Do I need to pay tax in Hong Kong? | Principles of Taxation |
|---|---|---|---|
| Hong Kong Resident / Individual Shareholder | Hong Kong Local Company | Usually there is no need | Distributions of profits deemed to be taxed are not subject to Salaries Tax or Personal Profits Tax. |
| Hong Kong Resident / Individual Shareholder | Non-Hong Kong local companies | may require | If the dividend is paid onarising in or received from Hong KongIn addition, the taxpayer may be required to file a profits tax return, but tax relief can usually be claimed. |
Are dividends received by a company taxable?
If a Hong Kong company receives a dividend from another Hong Kong company, the dividend will normally also be a dividend from the other Hong Kong company.Tax-exempt incomeThis is because the source of the dividend is taxed at the level of the distributing company.
However, if the dividend comes fromOverseas companiesIf the income is "Hong Kong-sourced", it is necessary to assess whether the income is "Hong Kong-sourced". If the income is from outside Hong Kong, it is generally not taxable, but it is advisable to retain documentation to prove the source in case of tax scrutiny.
| Shareholder Status | source of dividends | Do I need to pay tax in Hong Kong? | Principles of Taxation |
| Hong Kong Local Company | Hong Kong Local Company | No need | (a) the number of persons who areNon-taxable incomeIn the case of the "P", there is a complete exemption from profits tax. |
| Hong Kong Local Company | Overseas Subsidiaries Associates | Not required (common exemptions) | As long as you are satisfiedOffshore Income / Overseas SourcesIn addition, the Government will be exempted from profits tax if it is satisfied with the conditions set out in the relevant legislation. |
Points to note for non-Hong Kong residents, cross-border investors
When non-Hong Kong residents or cross-border investors receive dividends from Hong Kong stocks, the Hong Kong Government will not be liable to pay them.No withholding tax on dividends。
However, if you are filing tax returns in other jurisdictions (e.g. China, USA), you still need to be aware of the need to report overseas investment income and refer toDouble Taxation Agreement(Double Tax Agreement, DTA) to avoid double taxation.
- Double Taxation Agreement (DTA): Hong Kong has signed DTAs with a number of countries, and if you are a resident of an agreed country, you can take advantage of the terms of the agreement to avoid double taxation or enjoy a lower withholding tax rate.
- Overseas withholding tax: Dividend-paying companies are required to recognisePlace of RegistrationFor example, a certain percentage of dividend tax is usually withheld by the PRC tax authorities when investing in China H-shares. For example, when investing in China H-shares, a certain percentage of dividend tax is usually withheld by the China tax authorities. This has nothing to do with Hong Kong tax, but will affect your net return.
Frequently Asked Questions
Are company dividends tax deductible?
No. Dividends paid by the Company areProfit distribution behaviour, rather than operating expenses, and thereforeNot a tax deductionIf you misclassify an expense, it may result in a discrepancy in your tax return. Misclassification of expenses may lead to discrepancies in tax returns and tax recovery by the Inland Revenue Department.
Do I need to file tax return for dividend distribution from overseas company to Hong Kong company?
In general.Dividends paid by foreign companies are classified as foreign source gainsHowever, if the dividend is directly related to business activities in Hong Kong, the IRD is entitled to reassessment. However, if the dividend is directly related to business activities in Hong Kong, IRD has the right to reassess.
Will a company's dividend payout affect the amount of my tax return?
No. Dividend payments are made after the payment of corporate profits tax and will not affect taxable profits. However, it is advisable to clearly distinguish "dividend" from "salary" or "bonus" in the accounts to avoid misstatement.
How much tax do I have to pay on a $10 million dividend?
Dividend tax is not payable on after-tax surpluses of Hong Kong companies. Whether the amount is $1 million or $10 million, it is exempt from tax as long as it is derived from taxable profits.
What are the risks of misreporting / omission?
Incorrectly reporting dividends as an expense or omitting overseas income from your tax return may result in back taxes, penalties or audits by the Inland Revenue Department. It is advisable to keep the resolution documents, dividend warrants and bank records and consult an accountant or advisor.
What does a company have to do to prepare for a dividend payment?
The review of the financial statements and recognition of distributable earnings
The Adoption of Board Resolutions
The Arranging dividend payment documents and accounts
The Confirmation of Tax Implications and Reporting Methods with Tax Advisors
How much income is taxable in Hong Kong?
As long as your income for the year of assessment exceeds the personal allowance (i.e. HK$$132,000 per annum), you will be liable to pay tax.
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