Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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How double taxation relief applies to profits tax

As far as Hong Kong profits tax is concerned, Section 14 of Inland Revenue Ordinance stipulates that only profits arising in or derived from Hong Kong is taxable. Besides, for manufacturers operating across the border, their taxable profits are generally apportioned on a 50:50 basis. Furthermore, Section 16 permits deduction for mainland's / foreign taxes paid in the production of the assessable profits. In fact, these measures make double taxation relief largely useless. This is because the tax benefits under these measures generally exceed that available under Double Tax Relief (DTR). Press here for more.


In fact, even if DTR is to apply --- in such case the mainland-sourced income must be brought into the Hong Kong tax computation --- the tax credit in respect of the mainland tax is restricted to the hypothetical Hong Kong tax payable in respect of the hypothetical mainland-sourced income, i.e. maximum tax credit = H. K. effective tax rate  * mainland's income after mainland tax / (1 - H. K. effective tax rate). In effect, the restriction of tax credit makes Double Taxation Relief less favourable than the offshore claim which is to exclude the whole offshore profits from assessable profits. That is to say, the taxpayer should try offshore claim first before applying for double taxation relief.


In computing the Hong Kong tax, the mainland tax payment not yet allowed as tax credit is allowable as a deduction from the assessable income.


Press here for an illustration of computation of tax credit. For more, please visit the IRD's web site and read Departmental Interpretation and Practice Note No. 32.


Press here for more


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