Share with your friends

Hong Kong: Guidance on disallowing deductions for foreign taxes

Hong Kong: Disallowing deductions for foreign taxes

Guidance from Hong Kong’s tax authority reflects a new position that foreign income taxes imposed on gross income (for instance, withholding tax imposed on gross royalties, service fees, and management fees) are no longer deductible under the general deductibility rules of section 16(1).


Related content

The Hong Kong Inland Revenue Department (IRD) on 19 July 2019 released a revised Departmental Interpretation and Practice Notes No. 28 – Profits Tax: Deduction of Foreign Taxes (DIPN 28), a five-page IRD practice note that represents a significant deviation from long-standing law and practice. In particular, the IRD expressed the view that foreign income taxes imposed on gross income are no longer deductible under the general deductibility rules of section 16(1).

The first version of the revised DIPN 28 was issued 19 July 2019, and then subsequently updated a month later by the IRD to amend the second paragraph so that it explicitly states withholding tax is not deductible.


As a general rule, a deduction for profits tax paid or similar foreign taxes is not available under Hong Kong’s tax law— Inland Revenue Ordinance (IRO) section 17(1)(b) and section 17(1)(g). Section 16(1)(c) allows a deduction for foreign taxes (when they are substantially similar to Hong Kong profits tax, i.e., a tax on profits not tax on gross income) imposed on sums which are assessable to profits tax pursuant to specified deeming provisions.

In 1991, the Board of Review determined in D43/91 that taxes on gross receipts were outgoings or expenses incurred in the production of profits within the meaning of section 16(1) and that such deduction should not be excluded under IRO section 17(1)(b).

This view of the law was supported by the Hong Kong Financial Secretary in the 1997-1998 budget speech:

...deduction [for foreign withholding taxes] would not be available to overseas companies operating a branch here [in Hong Kong]. However, a judicial decision has indicated that foreign withholding tax charged on income or turnover is a legitimate expense, which should be deductible in determining assessable profits whatever the residency status of the company concerned. The Inland Revenue Department is following the judicial decision in its practice…. This will, I hope, offer another inducement to encourage overseas companies to set up branch operations in Hong Kong, thereby strengthening our status as an international financial centre.

The original DIPN 28 was consistent with this view and made it clear that when an amount of foreign tax does not qualify for deductions under section 16(1)(c), it may still be deductible pursuant to the general deductibility rules in section 16(1), but only when the tax is an expense that must be borne regardless of whether or not a profit is derived and is not an appropriation of profit.

Hong Kong’s long standing practice on foreign withholding taxes

Prior to the revision of DIPN 28 and consistent with D43/91, foreign withholding taxes imposed on gross income (such as management fees, interest, and royalties) were deductible. The long-established principle for foreign withholding taxes has meant that:

  • Foreign withholding taxes imposed by countries that have an income tax treaty for the avoidance of double taxation with Hong Kong would be entitled to a credit offset against their profits tax liability for the foreign withholding tax suffered, but would be denied a tax deduction for the withholding tax suffered.
  • Foreign withholding taxes imposed by countries which do not have an income tax treaty with Hong Kong would be allowed a tax deduction for the foreign withholding tax suffered, but not a credit offset to their Hong Kong profits tax liability.

Recent tax law change

In 2018, section 16(1)(c) was revised and section 16(2J) was introduced. The effect of these amendments was that section 16(1)(c) (i.e., the deduction for profits tax-type foreign taxes) is not available when the tax is paid in a jurisdiction where Hong Kong has entered into an income tax treaty. 

What are the key changes causing concern?

Change in long standing practice

The revised DIPN 28 states the following in paragraph 1:

Since a tax on profits or income is an application of the profits and not an outgoing or expense incurred in producing chargeable profits, the tax is not deductible. The assessable profits of a trade, profession or business are the profits before, and not after, deduction of profits tax… [Emphasis added]

The revised DIPN 28 also removes the comment:

…tax can properly be described as a charge on earnings (rather than on profits) that is payable regardless of whether or not a profit is made. As the tax is not an appropriation of the profits, a deduction is allowable under section 16(1). Typically such foreign taxes will take the form of a withholding tax on income derived by way of interest or royalties…

Potential implications

For multinational groups with their global or regional head offices situated in Hong Kong, or for groups with service centres or intellectual property holdings in Hong Kong, or for even simple service providers in Hong Kong, the revised policy may have significant implications and increase the overall cost of doing business in Hong Kong.

Clarification on the types of income deductible within section 16(1)(c)

Paragraph 2: “…foreign taxes on profits or income (e.g. withholding tax on royalties, licensing fees, service fees and management fees), subject to the provisions in section 16(1)(c), are not deductible.”

Potential implications

The implication could be viewed as being minimal at most. Section 16(1)(c) provides a deduction for foreign profits tax when two specific tests are satisfied:

  • The foreign tax is substantially the same nature as tax imposed under the IRO (i.e., tax is applied on profits and not on gross income).
  • When the income is deemed assessable under specific deeming provisions in section 15. Specifically, these are:

Deeming provision

Income to which deeming provision is applicable to

Section 15(1)(f)


Section 15(1)(g)


Section 15(1)(j)

Gains from disposal / maturity of a certificate of deposit or bill of exchange

Section 15(1)(k)

Gains from disposal / maturity of a certificate of deposit or bill of exchange

Section 15(1)(l)

Gains from disposal / maturity of a certificate of deposit or bill of exchange

There is a very narrow scope for the application section 16(1)(c); its operation is limited to foreign taxes that are taxed substantially the same as profits tax (i.e., tax on profits and not on gross receipts); and income will need to arise from “interest” and related debt securities where the income is not taxed under the general charging provisions in section 14.

Thus, based on these items, the scope of application of section 16(1)(c) would not cover royalties, licensing fees, service fees, and management fees because it could be argued that the commentary included within paragraph 2 is largely irrelevant.

KPMG observation

Tax professionals view the revised DIPN 28 as being a significant departure from current practice. This arises predominantly from a change as to how the IRD interpret the application of section 16(1) for foreign taxes on foreign income which is subject to Hong Kong profits tax. This departure could have significant implications for taxpayers across a variety of industries and groups. If the revised DIPN 28 is effective 1 April 2018, taxpayers would need to consider reviewing their transactions and prior-year tax computations to determine the implications for them.

Tax professionals view how the IRD interprets deductibility of foreign taxes in the revised DIPN 28 as perplexing. They note section 16(2J) is clearly intended to operate to deny a deduction under section 16(1)(c) and has limited application. It is not clear how these paragraphs extend the broader principle of withholding and other taxes on gross income.

The tax community has strongly recommended that the IRD reinstate the first version of the revised DIPN 28 (as released in July 2019) or revert back to the previous long-standing practice. As a final note, DIPNs are issued for the information and guidance for taxpayers. They do not have binding force and do not affect a taxpayer’s right of objection or appeal to the Commissioner, the board of review, or the courts.

For more information, contact a KPMG tax professional:

Linda Zhang | +1 (212) 954-2423 |

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Want to do business with KPMG?


loading image Request for proposal