Payments to Non-Residents from Hong Kong in 2026: When Royalties Cost 4.95%, When 16.5%, and Why the Hong Kong Payer Foots the Bill

Tax on royalties in Hong Kong is profits tax charged not on the payment itself but on the non-resident’s “deemed” income: section 15(1) of the Inland Revenue Ordinance (Cap. 112) treats certain payments as receipts from a business carried on in Hong Kong, section 21A turns 30% or 100% of the sum into the tax base, and section 20B makes the Hong Kong payer the person in whose name the tax is charged and from whom it is recovered. The standard effective rate on a royalty paid to a non-resident corporation in 2026 is 4.95% of the gross amount (30% × 16.5%), rising to 16.5% where the recipient is an associate and the property was once owned by a person carrying on business in Hong Kong, and falling to 2.475% on the first tranche under the two-tiered rates. This article sets out which payments are caught, how the base is computed, what the payer must do, how double taxation agreements interact with the domestic charge, and where businesses lose money on procedure, as at September 2026.

Important. Hong Kong has no withholding tax in the formal sense: the Ordinance does not require tax to be “withheld at source” as such. Instead it makes the payer the person in whose name the non-resident is assessed (section 20B(2)) and requires the payer, at the time of payment or credit, to deduct enough to produce the tax (section 20B(3)). A payer who remits the royalty in full and deducts nothing remains liable for the tax, and recovery is made against its own assets, not those of the non-resident.

The legal framework: which provisions of Cap. 112 and which IRD guidance apply in 2026

The legal basis for taxing payments to non-residents is the Inland Revenue Ordinance (Cap. 112) as in force in September 2026, together with the Inland Revenue Department’s practice material: Departmental Interpretation and Practice Notes No. 22 (revised August 2020), IRD information leaflets and FAQs, some of which were updated in 2026. The provisions are listed below with the amending ordinance that introduced them, because for royalties both the list of protected subject matter and the list of deemed sums were widened in 2004, 2011 and 2018.

Three features of this framework shape the whole practice. First, none of these provisions is called a “withholding tax”: the mechanism rests on deeming income and on designating the payer as the responsible person. Second, DIPN No. 22, the IRD’s principal practice note on royalties, does not mention section 20B at all, so the procedural layer has to be assembled from the statute, IRD leaflets and the notes and instructions to form BIR54. Third, the Schedule 8 rate of 16.5% has been unchanged since the year of assessment 2008/09 and the Schedule 8B two-tiered rates since 2018/19, whereas the wrapper around them — the connected-entity rules, the patent box, the FSIE regime and the global minimum tax — changed in 2018, 2023, 2024 and 2025, and it is the wrapper that produces most computational errors.

Does Hong Kong have a withholding tax on payments to non-residents?

Hong Kong has no general withholding tax: dividends, interest and service fees paid to a non-resident bear no Hong Kong tax unless the non-resident itself carries on business in Hong Kong. Only the closed list of payments in section 15(1) of Cap. 112 is taxed, and it is that list which produces an effect resembling a withholding tax. The Ordinance avoids the term: it deems the relevant sums to be trading receipts from a business carried on in Hong Kong and, through section 20B, shifts the administration onto the payer.

Payments for a non-resident’s services — consulting, development, marketing, engineering — fall under no paragraph of section 15(1), so the Hong Kong customer deducts no tax from them. There are two exceptions: where the non-resident in fact carries on business in Hong Kong (including through a permanent establishment or an agent), it is charged under the ordinary rules of sections 14 and 20A; and where the “service fee” is in substance consideration for the use of intellectual property or for imparting know-how connected with the use of property in Hong Kong, section 15(1)(b) applies. The label in the contract is secondary: the IRD looks at the substance of what is supplied.

For an investor the practical conclusion is this: Hong Kong remains one of the few jurisdictions in Asia where profit repatriation and payment for services give rise to no withholding tax, while payments for intellectual property, equipment hire, content licensing and live performances do. The basic rules of Hong Kong profits tax, including the territorial principle, are set out in Hong Kong Company Registration 2026: Requirements, Procedure, Taxes, and Annual Compliance.

Which payments to a non-resident are taxed: the five main categories in section 15(1)

Five main kinds of payment to a non-resident are caught: income from the exhibition or use in Hong Kong of films, tapes and sound recordings; royalties for the use of intellectual property in Hong Kong; royalties for use outside Hong Kong where the sum is deductible in Hong Kong; sums for the assignment of a performer’s right in respect of a performance given in Hong Kong; and hire charges for the use of movable property in Hong Kong. The first four are administered through the payer under section 20B; the fifth is not, and that difference costs money.

Section 15(1)(bc) stands apart, and its machinery is quite different. Added by Ord. 29 of 2018, it treats as trading receipts sums for the use outside Hong Kong of intellectual property or know-how generated from R&D activity for which a deduction is allowable under section 16B “in ascertaining profits of the person”. What is charged, therefore, is not the non-resident payee but the Hong Kong person that claimed the enhanced research deduction and then exploits the result outside Hong Kong. Section 21A does not extend to paragraph (bc) — it covers only paragraphs (a), (b) and (ba) — so the whole sum enters the base; section 20B does not extend to it either, so there is no charge in the payer’s name, no duty to deduct, and the paragraph does not appear in BIR54. How the 300% and 200% R&D deductions themselves work is covered in Hong Kong Profits Tax Deductions and Incentives in 2026: R&D at 300%/200%, Sections 16E and 16EA, Environmental Installations.

What “deemed income” means and why the non-resident need not carry on business in Hong Kong

A deemed trading receipt is a sum that the law treats as revenue from a business carried on in Hong Kong regardless of whether the recipient actually carries on such a business. The opening words of section 15(1) are deliberately wide: the listed sums “shall be deemed to be receipts arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong”. Without that construction an offshore licensor would fall outside section 14 altogether, since it does nothing in Hong Kong.

Several practical consequences follow. First, the non-resident needs no office, staff or permanent establishment in Hong Kong for a taxable base to arise. Second, the question “where is the source of the income” is not open for these sums: the source is assigned by statute and the general test of what the person did to earn the profits, and where, does not apply. Third, each paragraph of section 15(1) opens with the qualification “not otherwise chargeable to tax under this Part”, so the provision operates only as a supplement to section 14, not as a parallel regime.

If the recipient of the royalty does carry on business in Hong Kong, section 14 applies and section 21A with its 30% does not apply at all: the whole profit is taxed, not a fraction of the payment. That follows directly from the Court of Final Appeal decision in Lam Soon Trademark Limited v CIR (2006) 9 HKCFAR 391, cited in DIPN No. 22 (paragraph 34): the primary function of section 15(1) is “to bring in something which would otherwise be excluded”, and it excludes nobody from section 14. The IRD gives a clear warning: where an assessment was originally made under sections 15 and 21A and it later emerges that section 14 was the proper charging provision, an additional assessment may be raised under section 60.

When is property “used in Hong Kong”? Emerson Radio and Turner Entertainment

A royalty is caught by section 15(1)(b) only if the intellectual property is used in Hong Kong, and the territorial link is decided by where the right is actually exercised, not by where the payer sits. The leading authority is CIR v Emerson Radio Corporation (1999) 2 HKCFAR 501: rights conferred by the registration of trade marks are territorial, so royalties for the use of marks registered outside Hong Kong on goods sold outside Hong Kong fall outside section 15(1)(b). The application of a mark to goods by a manufacturer constitutes “use” of that mark, so only royalty income relating to goods manufactured in Hong Kong could be charged.

DIPN No. 22 (paragraph 14) takes the point further: property is not regarded as “used in Hong Kong” merely because the licensee is a Hong Kong company whose profits from goods manufactured and sold abroad are chargeable to profits tax. For paragraph (a) of section 15(1) the Court of Appeal in Turner Entertainment Networks Asia Inc v CIR [2015] 3 HKLRD 295 read the phrase “exhibition or use” as “exhibition or other use”: exhibition is simply one form of use, so the grant of rights in a film for transmission in Hong Kong is caught whether or not the film was in fact screened.

The practical value of these two decisions is that they limit an otherwise expansive provision. If the licence is granted to a Hong Kong company but the property is used outside Hong Kong and the expense is not deducted in Hong Kong, there is no tax. If the expense is deducted, section 15(1)(ba) takes over and the charge arises regardless of where the property is used.

Section 15(1)(ba): royalties for use outside Hong Kong that are taxed anyway

A royalty for the use of intellectual property outside Hong Kong is chargeable to Hong Kong tax if the sum is deductible in ascertaining the payer’s assessable profits in Hong Kong (section 15(1)(ba)). The paragraph was added by Ord. 12 of 2004 and, as DIPN No. 22 (paragraph 15) explains, exists to maintain tax symmetry: the government does not accept an outcome in which the expense reduces the Hong Kong base while the corresponding income escapes Hong Kong tax entirely.

The logic is simple and binds the two sides of the transaction together. If a Hong Kong company claims the royalty as a deductible expense, it thereby brings the matching sum into the non-resident’s tax base. If the royalty is not deducted — for example because it relates to offshore activity whose profits are not chargeable in Hong Kong — section 15(1)(ba) does not apply. Where offshore profits status is claimed, it is therefore essential not to claim the related royalties as a deduction: seeking both the offshore claim and the deduction creates a direct contradiction in the return.

The test is straightforward: once the royalty appears in the expense line of a Hong Kong company’s return, the question is no longer whether tax is payable for the non-resident but only at which rate — 4.95% or 16.5%. For groups this means that intra-group licence payments must be planned together with transfer pricing policy; the pricing and documentation requirements are covered in Transfer Pricing in Hong Kong 2026: Part 8AA of Cap. 112, Sections 50AAF and 50AAK, Master and Local Files, DIPN 58/59/60.

How the base is computed: 30% and 100% under section 21A

The tax base on a non-resident’s royalty is 30% of the sum received, or 100% where the sum is derived from an associate and the property was at some time owned by a person carrying on business in Hong Kong (section 21A(1)). The 30% figure applies to sums received or accrued on or after 1 April 2003; before that date the figure was 10%, which still appears in older computations and in IRD material.

The 100% rule is a targeted anti-avoidance provision. DIPN No. 22 (paragraph 28) describes the arrangement it was aimed at: a Hong Kong company that had developed property in-house sold it to an overseas subsidiary and licensed it back for a substantial royalty, creating a Hong Kong deduction against a minimal tax base in the recipient’s hands. With a 100% base the structure loses its point.

The proviso to section 21A(1)(a) switches the 100% rule off: it does not apply where the Commissioner is satisfied that no person carrying on a trade, profession or business in Hong Kong has at any time wholly or partly owned the property in respect of which the sum is paid. In other words, an ordinary multinational group that developed its technology abroad and licenses it to a Hong Kong subsidiary is taxed on the 30% base even though the parties are associates. DIPN No. 22 (paragraph 29) states the reason plainly: applying 100% to every payment to an associate would be restrictive and would discourage the importation of technology into Hong Kong.

“Associate” is defined widely in section 21A(3) — relatives, partners, partnerships, controlled corporations, trustees and beneficiaries of trusts — and section 21A(2) adds a look-through for trust structures: a sum derived from a trustee or from a corporation controlled by a trustee is deemed derived from each of the trustee, the corporation and the beneficiary. DIPN No. 22 (paragraph 33) notes that the definitions follow the pattern of sections 16EC and 39E, so the counterparty’s status has to be tested along the whole chain rather than by reference to a single shareholder. The “previously owned in Hong Kong” test is itself narrower than it looks: under paragraph 30 of the same note the Commissioner accepts that “owned” refers to direct ownership, and a shareholder does not own the company’s assets — the company owns them as a separate legal entity.

Where the ownership history is complicated — a patent resold several times, with a possible Hong Kong owner somewhere in the chain — DIPN No. 22 (paragraphs 39–42) recommends applying for an advance ruling under section 88A and Schedule 10 — the most reliable way to lock in the 30% base rather than 100% before the payment is made, and paragraph 31 describes exactly that route: where a sum is to be paid to an associate and either the payer or the recipient considers that the ownership history satisfies the proviso, confirmation that the 30% rate applies “may be obtained by way of an advance ruling from the Commissioner”. Rulings are not given on hypothetical situations (paragraph 42).

The 2026 rates: 4.95%, 2.475% and 16.5%

The standard effective rate of tax on a royalty paid to a non-resident corporation is 4.95% of the gross sum: the 30% base under section 21A multiplied by the 16.5% rate in Schedule 8. For a non-resident that is not a corporation the rate is 4.5% (30% × 15%). The 30% base applies to sums received or accrued on or after 1 April 2003, while the 16.5% and 15% rates have applied since the year of assessment 2008/09 — before that they were 17.5% and 16%, giving effective rates of 5.25% and 4.8%; neither the base nor the rates changed in 2026.

The two-tiered rates halve the rate on the first tranche: for corporations, 8.25% applies to a tax base of up to HK$2,000,000 — roughly the first HK$6,666,666 of gross royalties — giving an effective 2.475%.The IRD confirms that the regime is available to non-residents: answer 15 in its FAQ on two-tiered rates (last reviewed on 7 September 2026) states that a non-resident charged in the name of a Hong Kong payer may be charged at the two-tiered rates if it has no connected entity carrying on a trade, profession or business in Hong Kong, or no such connected entity has elected for that year, and that the payer must check the position with the non-resident and declare it in BIR54, attaching supplementary form S1 with the list of connected entities carrying on business in Hong Kong.

The lower-rate band is capped at HK$2,000,000 of assessable profits in total across all Hong Kong payers, not per payer. That matters for licensors with several Hong Kong counterparties: if each payer applies 8.25%, more than one band is used in aggregate and the difference will be assessed. For the same reason the IRD notes in answer 16 of the same FAQ that, because the Hong Kong payer may not be the only person reporting profits for that non-resident, at the time of payment it should retain tax as if the non-resident were not entitled to the two-tiered rates — that is, at the full rate of 16.5% for a corporation or 15% for any other person.

The connected-entity restriction sits in section 14AAC: where an entity has a connected entity at the end of its basis period, the two-tiered rates do not apply to it unless the Commissioner exempts it on the entity’s own written election (sections 14AAC(4)–(5)); in practice, as the IRD explains, the election is made by declaring it in the profits tax return, with confirmation that no other connected entity has elected for the same year. An entity is connected where one controls the other or both are under common control, with a threshold of more than 50% of capital, votes or profits (section 14AAB), while BIR54 and form S1 put the question in terms of connected entities carrying on a trade, profession or business in Hong Kong — foreign group companies that do no business in Hong Kong do not block the concession. Only one entity in the group can obtain the benefit for a given year and the election cannot be withdrawn within that year, although a different connected entity may elect for a different year. For a multinational group this is a choice: for any given year the lower band goes either to the Hong Kong operating company or to the non-resident licensor, not to both.

An annual budget concession then applies to the computed tax. For the year of assessment 2025/26 a one-off reduction of profits tax of 100% applies, subject to a ceiling of HK$3,000 per case; the legislation — the Inland Revenue (Amendment) (Tax Concessions, Concessionary Deductions and Allowances) Ordinance 2026 (Ord. 2 of 2026) — was passed by the Legislative Council on 13 May 2026 and gazetted on 22 May 2026. The IRD applies the concession to assessments raised on non-residents as well: in the examples in DIPN No. 22 the reduction for the relevant year is deducted from the computation.

What the Hong Kong payer must do under section 20B

Section 20B(2) provides that the non-resident is chargeable to tax in the name of any person in Hong Kong who paid or credited the relevant sums to it, and that the tax is recoverable from that person.Section 20B(3) adds the duty: at the time of payment or credit the payer must deduct so much of the sum as is sufficient to produce the tax, and the Ordinance expressly indemnifies the payer against any claim for making that deduction.

Ord. 21 of 2025, the ordinance that introduced the global minimum tax, added a definition to sections 20A(4) and 20B(4): “tax” means tax charged under Part 4 of Cap. 112, so the machinery for charging tax in the payer’s name applies to profits tax and not to top-up tax.

Procedurally it works as follows. The IRD issues to the Hong Kong person a BIR54 — Profits Tax Return in respect of Non-Resident Persons, which reports the non-resident’s assessable profits (or adjusted loss) for its basis period, the jurisdiction of tax residence by ISO 3166-1 alpha-2 code and the recipient’s tax identification number, the two-tiered rates declaration and details of the licence and of any agent; the form serves not only royalty cases but also non-residents carrying on business in Hong Kong and shipowners under section 23B(4A). One detail from the IRD’s guidance matters: the payer may report by reference to its own basis period for convenience, but if the non-resident claims the two-tiered rates or relief under a double taxation agreement, the basis period must be the non-resident’s. The notes to the form (edition 4/2025) reproduce the text of section 21A(1) in full, including the proviso to paragraph (a), while the definition of “associate” in section 21A(3) and the trust look-through in section 21A(2) are not set out there. The notice of assessment is issued in the Hong Kong payer’s name and it is the payer who settles the tax out of the money retained. If no return has been issued for the non-resident, the person who has become answerable must notify the Commissioner of chargeability in writing not later than 4 months after the end of the basis period (section 51(2)).

The BIR54 filing deadline is stated in the notice to file itself: the Block Extension Scheme announced each year by the IRD in its circular to tax representatives covers the returns bulk-issued on 1 April to corporations and partnerships (BIR51 and BIR52) and those issued to individuals on 4 May (BIR60), and the 2025/26 circular does not mention BIR54. For reference, the extended dates for the bulk-issued returns for 2025/26 are: code “N” (accounting date between 1 April and 30 November 2025) — no extension; code “D” (1–31 December 2025) — 17 August 2026; code “M” (1 January to 31 March 2026) — 16 November 2026. For a BIR54 the date in the notice governs, and any extension has to be applied for individually. All supplementary forms must be filed electronically through the Business Tax Portal or the Tax Representative Portal; mandatory electronic filing of the return itself was introduced for 2025/26 only for members of large multinational groups (a Part 4AA Entity under Schedule 63, with the EUR 750,000,000 threshold) and applies to forms BIR51 and BIR52, not BIR54. The forms and deadlines are covered in detail in The Hong Kong Profits Tax Return in 2026: BIR51, BIR52 and BIR54, Block Extension and Mandatory E-Filing.

UPPERSETUP handles non-resident computations, prepares BIR54 and reconciles amounts retained as part of its Accounting Support for Companies service.

Section 20A: the non-resident’s agent, equipment hire and the 1% on consignment sales

Section 20A states the general rule: a non-resident is chargeable either directly or in the name of its agent, the tax is recoverable both out of the non-resident’s assets and from the agent, and where there are several agents they may be charged jointly and severally. The agent must retain out of any assets of the non-resident coming into its hands enough to produce the tax (section 20A(2)) and is likewise indemnified for doing so.

For equipment hire this distinction is decisive. Hire charges for movable property used in Hong Kong are chargeable under section 15(1)(d) on 100% of the sum, but section 20B does not extend to them, so the Hong Kong hirer does not become the person in whose name the non-resident is charged and has no duty to deduct. The IRD’s FAQ leaflet for non-resident companies puts it directly: except for payments for the hire of movable property, the offshore company is chargeable in your company’s name and your company is required to retain sufficient money to meet the tax. In the hire case the tax is collected from the non-resident itself or through its agent under section 20A.

A separate rule sits in section 20A(3): a person who sells goods in Hong Kong on behalf of a non-resident must furnish the Commissioner with a quarterly return of the gross proceeds and pay at the same time 1% of those proceeds, or such lesser sum as may be agreed; the Commissioner may exempt the person on such conditions as he thinks fit. This is rarely remembered when consignment and agency sales are set up, yet the provision is in force and is not tied to the actual profitability of the transactions.

Entertainers and sportsmen: 10% and 11% of the fee

A performance in Hong Kong by a non-resident entertainer or sportsman on a commercial occasion is chargeable to profits tax, and the tax is administered through the Hong Kong payer — usually the promoter or sponsor (section 20B(1)(b)). The definitions of “entertainer or sportsman” and “commercial occasion or event” are in section 20B(4) and extend to promotional appearances and to participation in recordings, broadcasts and filming.

The IRD’s practice sets fixed retention percentages: 10% of the gross sum where the performance is procured directly with the entertainer or sportsman or through a non-resident agent that is an individual or a partnership, and 11% where it is procured through a corporate agent or a corporation; these percentages apply for years of assessment from 2020/21. The figures follow from the computation set out in the IRD leaflet: on a fee of HK$300,000 a deduction of one third is allowed for expenses, leaving assessable profits of HK$200,000, on which tax at 15% is HK$30,000 (that is, 10% of the fee), or at the 16.5% corporate rate HK$33,000 (11%).

The procedure differs from that for royalties. The Hong Kong payer completes Form IR623 immediately when the entertainer or sportsman arrives in Hong Kong and retains the relevant percentage of the fee; on receipt of the form the IRD issues an assessment to the payer, the tax is settled out of the retained funds, and an objection to the assessment must be lodged within one month of the date of issue and only where a properly completed return has been filed. The IRD leaflet setting out these procedures has been updated for the 2025/26 budget concession: 100% of the tax waived, subject to a ceiling of HK$3,000 per case. UPPERSETUP computes the retention, files Form IR623 and reconciles the IRD assessment as part of its Accounting Support for Companies service.

Double taxation agreements: 3%, 7% and the lower-of-two rule

A comprehensive double taxation agreement (CDTA) caps Hong Kong tax on royalties at a percentage of the gross sum, and where the two computations differ the lower amount is charged. DIPN No. 22 (paragraph 36) states it plainly: if the rate specified in the agreement is higher than the charge under the Ordinance, the resident of the partner jurisdiction is liable at the lower domestic figure.

Hong Kong’s network comprises more than fifty comprehensive agreements in force, with a further nine signed but not yet effective (Barbados, Cyprus, Jordan, Kyrgyzstan, the Maldives, Nigeria, Norway, Rwanda and Slovenia); the IRD maintains the current list. The Arrangement with the Mainland of China caps the tax on royalties at 7% of the gross amount where the recipient is the beneficial owner; the agreement with the United Kingdom caps it at 3%. The first Mainland arrangement of 1998 ceased to have effect when the 2006 Arrangement began to apply, so only the 2006 text with its protocols may be relied on.

All three examples in DIPN No. 22 are set in the year of assessment 2018/19, for which the budget concession was 100% subject to a ceiling of HK$20,000; for 2025/26 the ceiling is HK$3,000, so the absolute figures differ while the logic of taking the lower of the two computations does not.

Two limitations make the agreement a less universal tool than it appears. First, relief is available only to the beneficial owner of the royalty — DIPN No. 22 (paragraph 35) cites Indofood International Finance Ltd v JP Morgan Chase Bank CA [2006] STC 1195 and the OECD Commentary, requiring that the recipient enjoy the full privilege of directly benefiting from the income. Second, where the general anti-avoidance provisions or the specific rule in section 21A(1)(a) with its 100% base are invoked, the agreement rate does not apply at all (DIPN No. 22, paragraph 37). Proving residence status and obtaining a certificate of resident status are covered in Hong Kong Certificate of Resident Status 2026: IRD Criteria, the Application Process and Claiming Benefits under the Mainland China CDTA.

Section 15F: when the Hong Kong company pays the tax instead of the non-resident

Section 15F shifts the charge from the non-resident to the Hong Kong person: where a Hong Kong person has made value creation contributions in relation to intellectual property and the income from its use accrues to a non-resident associate, the part of the sum attributable to those contributions is treated as a trading receipt of the Hong Kong person and taxed in its hands. Value creation contributions are defined by reference to the DEMPE functions — development, enhancement, maintenance, protection and exploitation of the property — and to the provision of assets and assumption of the related risks.

The provision was added by Ord. 27 of 2018 — the Inland Revenue (Amendment) (No. 6) Ordinance 2018 — to implement Chapter VI of the OECD Transfer Pricing Guidelines and, as DIPN No. 22 (paragraph 21) explains, applies to years of assessment beginning on or after 1 April 2019. Its rationale is economic rather than legal ownership: a person performing part of the DEMPE functions in Hong Kong is regarded as the economic owner of the property to that extent.

One detail protects against double taxation: section 15F(4) expressly provides that the non-resident associate is not chargeable in respect of the same attributable amount. The tax is charged once — either on the Hong Kong person under section 15F or on the non-resident under sections 15(1) and 21A, never on both. In practice a group that develops a product with a Hong Kong team while holding the rights offshore must choose its position in advance and support it with a functional analysis rather than wait for an audit.

The other side: the Hong Kong licensor, the 5% patent box and the FSIE regime

Where the royalty is received by a Hong Kong company, the deeming machinery does not apply: ordinary profits tax under section 14 is charged at 16.5% or 8.25%, and qualifying intellectual property income may be taxed at the concessionary rate of 5% under Schedule 17FD. Only a patent, a plant variety right and a copyright subsisting in software, each generated from an R&D activity, qualify as eligible intellectual property. The patent box applies to years of assessment beginning on or after 1 April 2023; the election is made in writing and is irrevocable, and the concessionary portion of the profits is determined by the nexus formula: qualifying R&D expenditure multiplied by 130% and divided by total expenditure, with the result capped at 100%.

A new restriction took effect on 5 July 2026: for patents and plant variety rights whose date of filing falls on or after that date, the election is invalid unless there is a corresponding local patent or local plant variety right in Hong Kong. That “specified date” is defined as the expiry of 24 months after the commencement of the Inland Revenue (Amendment) (Tax Concessions for Intellectual Property Income) Ordinance 2024 (Ord. 17 of 2024), which took effect on 5 July 2024. Companies that intended to hold foreign patents without a Hong Kong filing must now file locally as well. The regime is analysed in Hong Kong Patent Box 2026: the 5% Rate on IP Income, Two-Tiered Rates and the FSIE Regime for Holding Companies.

Groups with foreign-sourced income are also subject to the FSIE regime. Section 15I deems specified foreign-sourced income received in Hong Kong by a member of a multinational group to be Hong Kong-sourced; for intellectual property income the exemption survives only to the extent determined by the nexus requirement (section 15L), and the recipient must notify the Commissioner (section 15J). The combination of FSIE and the patent box means that an empty holding company with no R&D function in Hong Kong obtains neither the concessionary rate nor the exemption. UPPERSETUP assesses where the rights are best held and how that fits the group’s transfer pricing position as part of its legal and strategic consulting.

Deadlines, penalties and time limits

Chargeability must be notified to the Commissioner in writing not later than 4 months after the end of the basis period unless a return has already been issued (section 51(2)). For a Hong Kong payer making its first royalty payment to a non-resident this is the easiest deadline to miss: BIR54 is not part of the annual bulk issue of returns, so the form cannot be relied on to arrive by itself.

An assessor may raise an additional assessment within 6 years after the end of the relevant year of assessment, and within 10 years in a case of fraud or wilful evasion (section 60). Because section 20B makes the Hong Kong payer the answerable person, the additional assessment is addressed to it even if the counterparty received the money long ago and the relationship has ended.

It is also worth remembering that engaging a service provider to prepare the filings is not in itself a reasonable excuse: sections 80(2AA) and 82A(1AA) of Cap. 112 say so expressly. An objection to an assessment must be lodged within one month of the date of its issue; where the assessment was an estimated assessment raised under section 59(3) because no return was filed, the objection is valid only if a properly completed return is submitted with it.

Step by step: what the Hong Kong payer should do

The sequence for any payment of royalties or similar sums to a non-resident turns on three questions: whether the payment is within section 15(1), which base applies, and who answers for the tax. The steps below assume a Hong Kong company with an ordinary accounting year and a single contract with a foreign rights holder.

1.       Characterise the payment. Establish what is actually being paid for: a right to use intellectual property, a service, a supply of goods, equipment hire or the assignment of a performer’s right. This determines whether section 15(1) is engaged at all.

2.       Determine where the property is used. Section 15(1)(b) requires use in Hong Kong; section 15(1)(ba) requires the sum to be deducted in Hong Kong. Record the reasoning in writing: the licensed territory, the place of manufacture and sale, the schedule of registered rights.

3.       Check whether the recipient carries on business in Hong Kong. If it does, section 14 applies to the whole profit rather than 30% of the payment (Lam Soon Trademark), and the section 20B machinery is out of place.

4.       Test whether the parties are associates. Apply the definition in section 21A(3) along the whole ownership chain, including trusts and controlled corporations.

5.       Trace the ownership history of the property. If it was ever owned by a person carrying on business in Hong Kong and the recipient is an associate, the base is 100%; “owned” means direct ownership under paragraph 30 of DIPN No. 22, so a Hong Kong shareholder in the chain does not by itself trigger the 100% base. Where the history is complex, apply for an advance ruling under section 88A.

6.       Establish whether the two-tiered rates are available. Ask the non-resident whether it has connected entities and whether any of them has elected; remember the single HK$2,000,000 band shared across all payers.

7.       Check the double taxation agreement. Confirm the recipient’s residence and beneficial ownership and the rate in the royalties article; compute the tax both ways and apply the lower amount.

8.       Retain the funds at the time of payment or credit. Section 20B(3) requires the deduction to be made when the payment is made; the IRD advises computing it at the full rate, without the two-tiered rates: 16.5% on the base for a corporation and 15% for any other person.

9.       Notify the IRD and obtain the return. If no BIR54 has been issued, notify under section 51(2) no later than 4 months after the end of the basis period.

10.    Complete BIR54 and declare the applicable treatment. Report the gross sum, the section 21A base and, where the conditions are met, the two-tiered rates declaration on behalf of the non-resident.

11.    Settle the tax out of the retained funds and keep the documents. Records are kept for 7 years; an objection to an assessment must be lodged within one month of its issue.

12.    Check the mirror consequences. Make sure the royalty deduction in your own return is consistent with transfer pricing policy and, for intra-group licences, with the possible application of section 15F.

UPPERSETUP reviews licensing structures, tests whether the parties are associates and prepares advance ruling applications as part of its legal and strategic consulting; support for the Hong Kong company itself is provided under Business Setup in Hong Kong: Company Registration and Accounting Services, and the full range of solutions is in the Catalog of company registration solutions.

Typical mistakes with payments to non-residents

Mistakes in this area are expensive precisely because the Hong Kong payer, not the recipient, bears the liability: by the time an assessment is raised the money has left the jurisdiction and recovering it from the counterparty is usually impossible.

1.       Assuming Hong Kong has no withholding tax and paying the royalty in full. The duty to deduct is in section 20B(3) and the liability in section 20B(2). A company that remitted HK$1,000,000 of royalties without deducting will pay 4.95% out of its own funds on assessment, plus any penalty.

2.       Applying the 30% base to a payment to an associate without checking the ownership history. If the property was ever owned by a person carrying on business in Hong Kong the base is 100% and the charge rises from 4.95% to 16.5%. The proviso to section 21A(1)(a) requires the Commissioner to be satisfied, not merely a declaration in the return, and the test looks at direct ownership of the property rather than at shareholdings in its owner.

3.       Retaining at the 8.25% rate in anticipation of the two-tiered rates. The IRD expressly directs payers to retain as if the concession were unavailable, since the non-resident may have other Hong Kong payers and the shared HK$2,000,000 band may already be used up.

4.       Forgetting that the lower band is available to only one entity in a group. Section 14AAC allows the benefit for a single connected entity per year and the election cannot be withdrawn within that year: choosing it for the operating company rules it out for the non-resident licensor for the same year (a different entity may elect for a different year).

5.       Assuming a double taxation agreement always reduces the charge. On a royalty of HK$1,000,000 with a 3% agreement rate the domestic computation is lower, and where section 21A(1)(a) is applied on a 100% base the agreement rate is unavailable altogether.

6.       Claiming the royalty as a deduction while arguing that no tax arises. Section 15(1)(ba) ties the two positions together: a deduction in Hong Kong brings the matching sum into charge regardless of where the property is used.

7.       Confusing equipment hire with royalties. Hire of movable property is taxed on 100% of the sum, but section 20B does not apply: the hirer does not become the answerable person and does not deduct, and the non-resident is charged directly or through an agent under section 20A.

8.       Documenting a performance as a “service fee to a production company” and skipping Form IR623. The form is filed as soon as the entertainer arrives, and the retention is 10% or 11% depending on whether the recipient is an individual, a partnership or a corporation.

9.       Electing the two-tiered rates for a non-resident without collecting the connected-entity data. The IRD warns expressly that incomplete information about connected entities is no shield: under section 80(2) it is an offence to give, without reasonable excuse, incorrect information affecting any person’s liability to tax, and the list of connected entities carrying on business in Hong Kong is attached to BIR54 on form S1.

10.    Not notifying the IRD when no return has arrived. The duty to notify chargeability under section 51(2) applies whether or not a return has been issued, and failure falls under sections 80(2)(e) and 82A.

11.    Ignoring section 15F in intra-group development. Where the DEMPE functions are carried out in Hong Kong while the rights sit with a non-resident associate, the Hong Kong company may be assessed on the attributable portion of the income at the full rate.

Who finds this hardest, who finds it easiest, and when to get a professional review

The hardest cases are groups whose intellectual property has migrated between companies: any sale of a patent, trade mark or software out of a Hong Kong company permanently changes the section 21A base for future royalties to associates from 30% to 100%. The same category includes media and entertainment projects (content licences, live performances, performers’ rights), franchise networks with a regional hub in Hong Kong, and technology companies with a distributed R&D team, for which section 15F creates a risk of Hong Kong taxation even where the rights are held offshore.

The easiest position belongs to businesses that pay non-residents only for services and goods: such payments fall outside section 15(1), so there is nothing to deduct and no additional return; the routine administration of such a Hong Kong company is covered by a standard support package — Business Setup in Hong Kong: Company Registration and Accounting Services. Moderate complexity attaches to companies paying ordinary arm’s length royalties to an unrelated foreign owner: a 30% base, a 4.95% charge, one BIR54 and a deduction at the time of payment. The form of the Hong Kong presence also affects both the tax and the reporting — the comparison is set out in Branch or Subsidiary in Hong Kong in 2026: What a Foreign Business Should Choose.

A professional review is warranted where: the intellectual property was previously owned by a Hong Kong company or its ownership history is unknown; the recipient is an associate; annual royalties exceed HK$6,666,666 so that the lower band becomes material; several Hong Kong payers pay the same non-resident; a double taxation agreement is claimed and beneficial ownership must be evidenced; development is carried out in Hong Kong while the rights are held abroad; or a migration of rights between jurisdictions is planned. Members of large multinational groups face an additional layer in the global minimum tax, which is covered in The Global Minimum Tax and HKMTT in Hong Kong in 2026: Scope, the IRD Portal and Form IR1485.

FAQ: tax on payments to non-residents from Hong Kong

Does Hong Kong have a withholding tax on royalties?

Not in the formal sense: the Inland Revenue Ordinance contains no separate withholding tax. Instead section 15(1) deems the royalty to be income from a business carried on in Hong Kong, section 21A sets the base at 30% or 100% of the sum, and section 20B makes the Hong Kong payer the person in whose name the tax is charged and requires it to deduct enough at the time of payment or credit. The economic effect is close to a withholding tax of 4.95% for corporate recipients.

How much tax is payable on a royalty to a non-resident: 4.95% or 16.5%?

The standard effective rate is 4.95% of the gross sum (a 30% base × 16.5%). The 16.5% rate applies where the recipient is an associate and the intellectual property was at any time wholly or partly owned by a person carrying on business in Hong Kong (section 21A(1)(a)). If the non-resident qualifies for the two-tiered rates, the first tranche is taxed at 8.25%, giving an effective 2.475% until the HK$2,000,000 base is used up.

Must tax be deducted from payments to a foreign service provider?

No, so long as the contractor does not carry on business in Hong Kong: services are not within the list in section 15(1) and no duty to deduct arises. Care is needed where the “services” in fact pay for the right to use technology or a brand, or for imparting know-how connected with the use of property in Hong Kong — such sums are chargeable under section 15(1)(b).

Who pays the tax if the Hong Kong company remitted the royalty in full and deducted nothing?

The Hong Kong company. Under section 20B(2) the non-resident is charged in its name and the tax is recoverable from it by every means the Ordinance provides; the deduction under section 20B(3) is a way of securing the funds, not a condition of the liability. An assessment may be raised within 6 years, or 10 years in a case of wilful evasion.

Do the two-tiered rates apply to a non-resident charged through a Hong Kong payer?

Yes. The IRD’s FAQ on the two-tiered rates (last reviewed on 7 September 2026) states that a non-resident may be charged at 8.25%/16.5% if it has no connected entity carrying on business in Hong Kong or none of them has elected for the year, and that the Hong Kong payer makes the declaration in BIR54 with supplementary form S1. The lower band is capped at HK$2,000,000 of assessable profits across all payers, and the IRD advises retaining at the full rate at the time of payment.

How does a double taxation agreement affect the rate?

An agreement caps the tax at a percentage of the gross royalty: 7% under the Arrangement with the Mainland of China, 3% under the agreement with the United Kingdom. The tax is computed both ways and the lower amount is charged: on a royalty of HK$1,000,000 with a 3% cap the domestic computation is lower, while on HK$2,000,000 the agreement is better. Relief is unavailable where the recipient is not the beneficial owner or where section 21A(1)(a) has been applied on a 100% base.

Is the hire of equipment that a non-resident rents out in Hong Kong taxable?

Yes, under section 15(1)(d), and the tax base is the whole payment: the 30% rule in section 21A does not extend to the hire of movable property. But section 20B does not apply to such payments — the hirer does not become the answerable person and does not deduct; the non-resident is charged directly or through an agent under section 20A.

What should be done when paying a fee to a foreign entertainer or sportsman?

File Form IR623 as soon as the entertainer or sportsman arrives in Hong Kong and retain 10% of the fee where the performance was procured directly or through an agent that is an individual or a partnership, and 11% where it was procured through a corporate agent or a corporation. The IRD issues the assessment to the Hong Kong payer, the tax is settled from the retained funds, and an objection must be lodged within one month of the date of issue.

Can the 30% base rather than 100% be confirmed in advance?

Yes, through an advance ruling under section 88A of Cap. 112 and Schedule 10. DIPN No. 22 (paragraphs 39–42) states that the applicant must disclose all information known to it, above all the ownership history of the property: who owned it and when, and whether any owner carried on business in Hong Kong. The procedure is described in DIPN No. 31.

Key takeaways

Hong Kong has no general withholding tax, but payments to non-residents for the use of intellectual property, for the exhibition of content, for the assignment of a performer’s right and for the hire of movable property are chargeable to profits tax through the deeming machinery of section 15(1). The base on royalties is 30% of the sum, which at 16.5% produces an effective 4.95%, or 4.5% for a non-resident that is not a corporation; under the two-tiered rates the first tranche costs 2.475% until the HK$2,000,000 base — shared across all Hong Kong payers — is exhausted. The base rises to 100% where the recipient is an associate and the property was once owned by a person carrying on business in Hong Kong, and in that case a double taxation agreement offers no relief. The statute makes the Hong Kong payer answerable: it is charged in the non-resident’s name under section 20B(2), deducts at the time of payment under section 20B(3), files BIR54 and remains answerable to an additional assessment for 6 years. Hire of movable property is the exception: taxed on 100% of the sum but administered through the non-resident or its agent under section 20A. Entertainers and sportsmen have their own procedure with Form IR623 and retention of 10% or 11%. On the other side of the ledger, a Hong Kong licensor faces ordinary rates, the 5% patent box and the FSIE regime — and for patents and plant variety rights filed on or after 5 July 2026 the patent box election requires a corresponding local right in Hong Kong.

Summary

Hong Kong has no separate withholding tax, but payments to non-residents are charged to profits tax through deemed income: section 15(1) of the Inland Revenue Ordinance (Cap. 112) treats as income from a business carried on in Hong Kong sums for the exhibition or use in Hong Kong of films and sound recordings (paragraph (a)), royalties for the use of intellectual property in Hong Kong (paragraph (b)), royalties for use outside Hong Kong where the sum is deductible in Hong Kong (paragraph (ba)), the assignment of a performer’s right for a performance given in Hong Kong on or after 29 June 2018 (paragraph (bb)) and the hire of movable property in Hong Kong (paragraph (d)). Under section 21A the base is 30% of the sum for amounts received on or after 1 April 2003, and 100% where the sum is derived from an associate and the property was at any time owned by a person carrying on business in Hong Kong; the proviso to section 21A(1)(a) preserves the 30% base where the Commissioner is satisfied that there was no such owner. At the 16.5% rate in Schedule 8 the effective charge is 4.95% of the gross sum; under the two-tiered rates of 8.25% on a base of up to HK$2,000,000 (Schedule 8B) it is 2.475%; for non-corporate non-residents it is 4.5% at the 15% rate. Section 20B(2) makes the Hong Kong payer the person in whose name the non-resident is charged and section 20B(3) requires a sufficient deduction at the time of payment or credit; the return is BIR54. The hire of movable property falls outside section 20B and is administered under section 20A, which also requires quarterly payment of 1% of the gross proceeds of a non-resident’s goods sold in Hong Kong. For entertainers and sportsmen the IRD sets retention at 10% (direct engagement or an agent that is an individual or partnership) and 11% (corporate agent), with Form IR623. Agreements cap the charge: the Mainland of China at 7%, the United Kingdom at 3%; the lower of the two computations is charged, but agreement relief is unavailable where section 21A(1)(a) applies on a 100% base. Section 15F charges the Hong Kong person performing DEMPE functions where the income accrues to a non-resident associate and exempts that associate in respect of the same amount. Chargeability must be notified within 4 months under section 51(2); assessments may be raised for 6 years, or 10 years for wilful evasion (section 60); penalties are a fine at level 3 (HK$10,000) plus treble the undercharge (sections 80(2) and 82A). For 2025/26 a budget concession waives 100% of the tax, subject to a ceiling of HK$3,000. Current as at September 2026.

Sources

Level 1 — legislation and regulator materials

1.       Inland Revenue Ordinance (Cap. 112), section 14 “Charge of profits tax” — Hong Kong e-Legislation.

2.       Cap. 112, section 14AAC “Charge of profits tax for connected entities” — Hong Kong e-Legislation.

3.       Cap. 112, section 15 “Certain amounts deemed trading receipts” — Hong Kong e-Legislation.

4.       Cap. 112, section 15F “Sums derived from intellectual property by non-Hong Kong resident associates”— Hong Kong e-Legislation.

5.       Cap. 112, section 15I “Specified foreign-sourced income regarded as arising in or derived from Hong Kong” — Hong Kong e-Legislation.

6.       Cap. 112, section 15L “Exception 2: excepted portion of qualifying IP income ascertained in accordance with nexus requirement” — Hong Kong e-Legislation.

7.       Cap. 112, section 20A “Persons chargeable on behalf of a non-resident” — Hong Kong e-Legislation.

8.       Cap. 112, section 20B “Persons chargeable in respect of certain profits of a non-resident” — Hong Kong e-Legislation.

9.       Cap. 112, section 21A “Computation of assessable profits from cinematograph films, patents, trade marks, etc.” — Hong Kong e-Legislation.

10.    Cap. 112, section 51 “Returns and information to be furnished” — Hong Kong e-Legislation.

11.    Cap. 112, section 60 “Additional assessments” — Hong Kong e-Legislation.

12.    Cap. 112, section 80 “Penalties for failure to make returns, making incorrect returns, etc.” — Hong Kong e-Legislation.

13.    Cap. 112, section 82A “Additional tax in certain cases” — Hong Kong e-Legislation.

14.    Cap. 112, Schedule 8 “Rate of Profits Tax in respect of a Corporation” — Hong Kong e-Legislation.

15.    Cap. 112, Schedule 8A “Two-tiered Rates of Profits Tax — Persons other than Corporations” — Hong Kong e-Legislation.

16.    Cap. 112, Schedule 8B “Two-tiered Rates of Profits Tax — Corporations” — Hong Kong e-Legislation.

17.    Cap. 112, Schedule 17FD “Eligible IP Income: Concessionary Tax Treatment and Nexus Requirement”— Hong Kong e-Legislation.

18.    Criminal Procedure Ordinance (Cap. 221), Schedule 8 “Level of Fines for Offences” — Hong Kong e-Legislation.

19.    Departmental Interpretation and Practice Notes No. 22 (Revised) “Taxation of royalties and other income from intellectual properties”, August 2020 — Inland Revenue Department.

20.    List of Departmental Interpretation and Practice Notes — Inland Revenue Department.

21.    FAQ on Two-tiered Profits Tax Rates Regime (last reviewed 7 September 2026) — Inland Revenue Department.

22.    Leaflet “Taxation of non-resident entertainers and sportsmen in Hong Kong” — Inland Revenue Department.

23.    FAQ “Non-resident Persons (Other Than Individuals)” — Inland Revenue Department.

24.    Notes and Instructions — Form BIR54 (edition 4/2025) — Inland Revenue Department.

25.    Profits Tax — rates and general rules — Inland Revenue Department.

26.    Completion of Profits Tax Returns and Supplementary Forms — Inland Revenue Department.

27.    2026-27 Budget — Tax Measures — Inland Revenue Department.

28.    Tax Concessions for Intellectual Property Income — Patent Box Regime — Inland Revenue Department.

29.    Comprehensive Double Taxation Agreements concluded — Inland Revenue Department.

30.    Consolidated text of the Arrangement between the Mainland of China and the Hong Kong SAR — Inland Revenue Department.

31.    Synthesised text of the agreement between the Hong Kong SAR and the United Kingdom — Inland Revenue Department.

32.    Circular Letter to Tax Representatives — Block Extension Scheme for lodgement of 2025/26 tax returns— Inland Revenue Department.

Level 2 — professional commentary

33.    KPMG China — The patent box tax incentive in Hong Kong comes into operation (July 2024) — KPMG.

34.    Deloitte China — Hong Kong Budget 2026/27 — Deloitte.

Disclaimer

This material is for information purposes only and does not constitute legal, tax, financial, investment or consulting advice. Before making any decision, obtain individual professional advice that takes into account your specific situation, jurisdiction, company status and the current requirements of the regulators. Current as at September 2026.