Tax Implications Under the Taiwan-HK-Macau Relations Act: Taiwan Income for Hong Kongers

The first quarter of 2025 has seen a notable uptick in inquiries from Hong Kong-based professionals and small business owners regarding the tax treatment of income sourced from Taiwan. This is not a coincidence. The Hong Kong Special Administrative Region Government’s Trade and Industry Department (TID) updated its licensing guidelines under the Protection of Non-Government Secrets (Taiwan) Ordinance (Cap. 592) in late 2024, tightening the framework for cross-strait business activities. Simultaneously, the Taiwan authorities have intensified their scrutiny of foreign-source income (FSI) for tax residents, a shift directly impacting Hong Kongers who maintain business ties, rental properties, or investment portfolios in Taiwan. The core tension for a Hong Kong tax resident is this: Taiwan income is not automatically “offshore” for Hong Kong tax purposes, nor is it automatically exempt from Taiwan’s own tax net. The Taiwan-Hong Kong-Macau Relations Act (the “Act”) serves as the foundational legal instrument governing these cross-strait interactions, and its tax implications are often misunderstood. This article dissects the operative tax positions for a Hong Kong resident deriving income from Taiwan, navigating the Hong Kong territorial source principle, the provisions of the Act, and the practical compliance requirements on both sides of the Strait.

The Foundational Legal Framework: The Taiwan-HK-Macau Relations Act

The Taiwan-Hong Kong-Macau Relations Act is the primary legislation in Taiwan governing private law, economic, and cultural relations with Hong Kong and Macau. Enacted in 1997, its tax-related provisions are not a direct tax code but create a legal environment that determines how other tax laws apply. For a Hong Kong resident, the Act’s most critical impact is on the determination of residency and source of income.

Residency Status and the “Source” of Income

Under Article 4 of the Act, residents of Hong Kong are generally treated as “foreign nationals” for the purposes of Taiwan’s domestic laws, including the Income Tax Act. This is a pivotal distinction. It means a Hong Kong resident is not automatically considered a Taiwan tax resident simply by spending time there, unless they meet the 183-day physical presence test under the Taiwan Income Tax Act. A Hong Konger who spends 100 days a year in Taiwan managing a business is a non-resident for Taiwan tax purposes. The tax rate on business profits for a non-resident is a flat 20% on gross income (Article 73, Taiwan Income Tax Act), a significant penalty compared to the progressive rates (5% to 40%) for residents on net income.

The Hong Kong Inland Revenue Ordinance (Cap. 112) applies its territorial source principle. Under Section 14, profits tax is chargeable on profits “arising in or derived from” Hong Kong. If a Hong Kong resident operates a sole proprietorship that provides consulting services to a Taiwanese client, the source of that income is determined by where the services are performed. If the consultant does all the work from a Hong Kong office, the income is likely offshore and not subject to Hong Kong profits tax. However, if the consultant travels to Taipei to deliver the services, a portion of that income becomes onshore and taxable in Hong Kong. The burden of proof lies with the taxpayer to demonstrate the offshore nature, a position consistently upheld by the Hong Kong court in CIR v. Hang Seng Bank Ltd (1991).

The Act’s Impact on Double Taxation Relief

There is no comprehensive double taxation agreement (DTA) between Hong Kong and Taiwan. The Act does not provide a mechanism for tax credit relief. This creates a structural risk of double taxation. A Hong Kong resident who is deemed a Taiwan tax resident (spending 183+ days in Taiwan) will be taxed in Taiwan on their worldwide income. The same income, if sourced in Hong Kong, would also be taxed in Hong Kong. Without a DTA, the taxpayer cannot claim a foreign tax credit in one jurisdiction against the liability in the other. The only relief available is a unilateral deduction under Section 16(1)(c) of the IRO for foreign taxes paid, but this is a deduction against assessable profits, not a direct credit against the tax charged, making it a less effective remedy.

Practical Tax Scenarios for Hong Kong Residents with Taiwan Income

The application of these rules varies significantly based on the type of income. Three common scenarios for Hong Kongers are examined below.

Scenario A: Rental Income from Taiwan Property

A Hong Kong resident who owns a rental apartment in Taipei must file a Taiwan tax return. Under the Taiwan Income Tax Act, rental income is sourced in Taiwan. For a non-resident landlord (less than 183 days in Taiwan), the tax is a flat 20% on the gross rental income. The standard practice is for the tenant to withhold this tax at source and remit it to the Taiwan tax authorities. The Hong Kong landlord receives the net amount. For Hong Kong profits tax purposes, rental income from property outside Hong Kong is generally considered offshore and is not subject to profits tax under Section 14 of the IRO. However, if the landlord uses a Hong Kong agent to manage the property and collect rent, the Inland Revenue Department (IRD) may argue that the management activity constitutes a trade or business in Hong Kong, potentially bringing a portion of the income into the Hong Kong tax net. The IRD’s practice, as outlined in its Departmental Interpretation and Practice Notes (DIPN) No. 21, is to look at the totality of activities performed in Hong Kong.

Scenario B: Business Profits from a Taiwan-based Sole Proprietorship

A Hong Kong resident who operates a small trading company as a sole proprietor, where the company’s operations are physically based in a Taiwan office, faces a different challenge. The Taiwan tax authorities will view the business as having a permanent establishment (PE) in Taiwan. The profits attributable to that PE are subject to Taiwan business income tax at the standard corporate rate of 20% (Article 5, Taiwan Income Tax Act). The Hong Kong IRD will also apply the source principle. If the key profit-generating activities (e.g., negotiating contracts, making strategic decisions) occur in Hong Kong, the IRD may still treat the profits as Hong Kong-sourced. The taxpayer must maintain meticulous records to demonstrate the split. A common strategy is to have the Hong Kong entity act as a head office and the Taiwan entity as a branch, with a formal cost-sharing agreement. The IRD’s 2017 guidance on transfer pricing (DIPN No. 46) is directly relevant here, requiring arm’s length pricing for intra-group transactions.

Scenario C: Employment Income for a Hong Kong-based Employee of a Taiwan Company

A Hong Kong resident employed by a Taiwan-headquartered company but working entirely from Hong Kong faces a clear tax position. The employment income is sourced in Hong Kong (where the services are performed) and is chargeable to Hong Kong salaries tax under Section 8 of the IRO. The Taiwan tax authorities will generally not tax this income, as the employee is not present in Taiwan. However, if the employee makes occasional business trips to Taiwan, a portion of the income becomes Taiwan-sourced. Under the Taiwan Income Tax Act, a non-resident employee is taxed on the Taiwan-source portion at a flat 18% (Article 8). The employer is required to withhold this tax. The Hong Kong IRD will grant a deduction for the foreign tax paid under Section 16(1)(c) of the IRO, reducing the Hong Kong salaries tax liability on the same income. This is one of the few areas where unilateral relief works reasonably well.

Compliance, Reporting, and the Statute of Limitations

The administrative burden for a Hong Kong resident with Taiwan income is substantial, requiring filings in two separate jurisdictions.

Taiwan Filing Requirements

A Hong Kong resident with Taiwan-source income must file an annual income tax return in Taiwan. The deadline is May 31st of the following year. For non-residents, the tax is typically withheld at source, but a return is still required to claim any refundable withholding tax or to report capital gains. The Taiwan tax authorities have a statute of limitations of seven years for tax assessments (Article 21, Tax Collection Act). This means the IRD in Hong Kong and the Taiwan tax authorities can exchange information under the Taiwan-Hong Kong-Macau Relations Act for up to seven years after the tax year in question. The practical risk is that a taxpayer who fails to report a 2019 rental income in Taiwan could face a reassessment in 2026.

Hong Kong Reporting and the IRD’s Position

In Hong Kong, the taxpayer must declare the Taiwan income on their Profits Tax Return (BIR51/52) or Salaries Tax Return (BIR60). The IRD will scrutinize the claim that the income is offshore. The taxpayer must provide a detailed breakdown of activities, contracts, and payment flows. The IRD’s standard practice is to issue a questionnaire (IR6163) to gather this information. The statute of limitations for Hong Kong tax assessments is six years from the end of the year of assessment (Section 60, IRO). In cases of fraud or wilful evasion, this period extends to ten years. The IRD has been known to use its information-gathering powers under the Inland Revenue Ordinance to request information from Taiwan-based entities, though the process is slower without a formal DTA.

The Role of the Taiwan-Hong Kong-Macau Relations Act in Information Exchange

The Act provides a legal basis for mutual legal assistance in tax matters, though it is not as robust as a formal DTA. Article 18 of the Act allows for the exchange of information between the two sides for the purpose of tax collection. In practice, this means that if the IRD suspects underreporting of Taiwan income, it can formally request information from the Taiwan tax authorities. The process is bureaucratic but functional. The 2024 update to the TID’s guidelines under Cap. 592 has strengthened this mechanism, particularly for businesses involved in cross-strait trade. The key takeaway for the taxpayer is that the risk of detection is real and increasing.

Conclusion: 5 Actionable Takeaways for Hong Kong Residents

1. Determine your Taiwan tax residency first: Count your physical days in Taiwan. If you exceed 183 days, you are a Taiwan tax resident and must file on your worldwide income, creating a high risk of double taxation without a DTA.
2. Source your income meticulously for Hong Kong: The burden of proof is on you to show that Taiwan-sourced business profits are offshore for Hong Kong profits tax. Maintain a detailed log of where contracts are negotiated, where decisions are made, and where services are performed.
3. Withhold tax at source on Taiwan rental income: Ensure your tenant in Taiwan withholds the 20% non-resident tax and issues you a withholding certificate. This is your primary evidence for claiming a deduction in Hong Kong.
4. File in Taiwan even if tax is withheld: A non-resident must file a Taiwan tax return by May 31st to claim any potential refund or to correctly report capital gains. Failure to file can trigger the seven-year statute of limitations.
5. Prepare for a seven-year lookback: The Taiwan tax authorities have a seven-year assessment window. Keep all records—lease agreements, bank statements, travel itineraries, and contracts—for a minimum of seven years from the end of the relevant tax year.

本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。 This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.