US Tax Treaty Non-Discrimination Article for Hong Kong: Equal Treatment for US Nationals Under Article 24

The question of whether a Hong Kong resident who is also a US national can claim the protections of the non-discrimination article in a US tax treaty—without a comprehensive double taxation agreement between the two jurisdictions—has moved from academic curiosity to a pressing compliance reality. The IRS’s 2025-2026 Priority Guidance Plan, released in January 2025, explicitly includes projects on the application of tax treaty benefits to residents of non-treaty jurisdictions, a direct response to the growing number of US citizens residing in Hong Kong and the increasing complexity of their cross-border holdings. Simultaneously, the Hong Kong Inland Revenue Department (IRD) has intensified its focus on beneficial ownership and treaty shopping, raising the stakes for any taxpayer attempting to invoke a treaty’s equal treatment clause. For the estimated 85,000 US citizens living in Hong Kong (US State Department, 2024), the central question is whether the US-Hong Kong Tax Information Exchange Agreement (TIEA) or the residual provisions of the US-China Income Tax Treaty can be leveraged to prevent discriminatory taxation—specifically, the imposition of higher US withholding taxes on dividends, interest, or royalties paid to a Hong Kong entity owned by a US national. This article examines the statutory and treaty framework, the limits of Article 24 of the US Model Convention, and the practical implications for Hong Kong-based US persons.

The Foundational Gap: No Comprehensive US-HK Treaty

The absence of a comprehensive income tax treaty between the United States and Hong Kong is the single most important fact governing this analysis. The US-Hong Kong TIEA, signed in 2014 and in force since 2016, provides for the exchange of information on request but contains no substantive provisions on tax rates, permanent establishment thresholds, or non-discrimination. This means a US national resident in Hong Kong cannot directly invoke a non-discrimination article against the United States under any bilateral instrument specific to Hong Kong.

The US-China Treaty as a Potential Proxy. The US-China Income Tax Treaty (signed 1984, in force 1987) does contain a non-discrimination article—Article 24—which provides that “nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.” The critical question is whether Hong Kong, as a Special Administrative Region of China, constitutes part of the “other Contracting State” for the purposes of this article when a US national resides there.

The Territorial Limitation. The US-China Treaty applies to “the territory of China,” which under Article 3(1)(a) is defined as “all the territory of the People’s Republic of China, including its territorial sea, and the seabed and subsoil thereof.” Hong Kong was a British colony when the treaty was signed in 1984 and was not included in its territorial scope. The Joint Declaration of 1984 and the Basic Law of Hong Kong (Article 151) grant Hong Kong authority to negotiate its own tax treaties separately from Mainland China. The US Treasury Department’s Technical Explanation of the US-China Treaty (1986) explicitly notes that the treaty applies only to “the territory of the People’s Republic of China as defined in the Agreement,” which at the time excluded Hong Kong. This position has not been revised. Consequently, a US national residing in Hong Kong cannot rely on Article 24 of the US-China Treaty for protection against US taxation.

The Relevant Non-Discrimination Provisions Under US Domestic Law

Given the treaty gap, the primary source of non-discrimination protection for a US national in Hong Kong is found within the Internal Revenue Code itself, specifically IRC § 891 and the case law interpreting the “reciprocity” requirement.

IRC § 891: The Reciprocal Exemption. IRC § 891 authorizes the President to impose “double rates” of tax on citizens or corporations of a foreign country that subjects US citizens or corporations to “discriminatory or extraterritorial taxes.” This provision is retaliatory in nature and has rarely been invoked. For a Hong Kong-based US national, the section offers no direct relief because the United States itself is the jurisdiction imposing the higher tax. The section is relevant only if Hong Kong were to impose discriminatory taxes on US citizens residing there—which, under Hong Kong’s territorial source principle, it generally does not.

The “Same Circumstances” Test Under Treas. Reg. § 1.1441-6. When a US national resident in Hong Kong receives US-source income (e.g., dividends from a US corporation), the default withholding rate under IRC § 871(a)(1) is 30%. A reduced rate is available only if a treaty applies. For a US citizen, the US-Hong Kong TIEA provides no rate reduction. However, Treas. Reg. § 1.1441-6(b)(2) provides that a US citizen who is a resident of a foreign country may claim treaty benefits under that foreign country’s treaty with the United States, provided the citizen is also a “resident” of that foreign country for treaty purposes. This regulation opens a narrow path: if a US national in Hong Kong can establish that they are a resident of China for treaty purposes—a difficult but not impossible argument—they could potentially access the US-China Treaty’s reduced withholding rates. The non-discrimination article would then apply to prevent the United States from imposing more burdensome conditions on that US national than on a Chinese national in the same circumstances.

The “Limitation on Benefits” Hurdle. Even if a US national in Hong Kong could establish Chinese treaty residence, Article 23 of the US-China Treaty (Limitation on Benefits) would apply. The article requires that the person claiming benefits be a “qualified resident” of the other Contracting State. For an individual, this requires being a resident of China (Mainland) for tax purposes. The IRD’s practice of issuing “Certificate of Hong Kong Resident Status” is specific to Hong Kong’s own tax treaties and is not recognized by the US-China Treaty. The IRS’s position, as stated in Revenue Ruling 2004-76, is that residents of Hong Kong are not residents of China for purposes of the US-China Treaty. This ruling has not been challenged successfully.

Practical Application for Hong Kong-Based US Nationals

The three most common scenarios where a US national in Hong Kong might seek non-discrimination protection are: (1) receiving US-source dividends through a Hong Kong holding company; (2) being subject to US branch profits tax on a Hong Kong business operation; and (3) facing higher US estate and gift tax rates as a non-resident alien.

Dividend Withholding Through a Hong Kong Entity. A US national who is the sole shareholder of a Hong Kong company that receives US-source dividends faces a 30% withholding tax on those dividends. The company itself is a Hong Kong tax resident and cannot claim treaty benefits under the US-China Treaty. The US national cannot claim the benefits directly because the income is earned by the company, not the individual. Article 24 of the US Model Convention would prohibit the United States from imposing a higher withholding rate on a Hong Kong company owned by a US national than on a Hong Kong company owned by a Chinese national. However, because no treaty exists between the US and Hong Kong, this protection is unavailable. The only solution is to restructure the holding through a jurisdiction that has a treaty with the US, such as Singapore or Switzerland, which introduces additional compliance costs and substance requirements.

Branch Profits Tax. A US national operating a Hong Kong business through a US branch (a “disregarded entity” for US tax purposes) may be subject to the branch profits tax under IRC § 884. This tax is imposed on a foreign corporation’s “dividend equivalent amount” attributable to its US trade or business. The rate is 30%, unless reduced by treaty. The non-discrimination article in the US Model Treaty would prevent the US from imposing this tax on a Hong Kong corporation if a US corporation in the same circumstances would not be subject to it. Again, without a treaty, the full 30% rate applies. The US national cannot avoid this by claiming the business is “Hong Kong-sourced” because the branch profits tax is based on the US business activity, not the source of income.

Estate and Gift Tax. US citizens are subject to US estate tax on their worldwide assets at their death, with a lifetime exemption of USD 13.61 million for 2024 (USD 13.99 million for 2025). Non-resident aliens (NRAs) are subject to estate tax only on US-situs assets, with a much lower exemption of USD 60,000. A US citizen residing in Hong Kong cannot convert to NRA status for estate tax purposes. However, if the US citizen were to renounce citizenship (a drastic step subject to IRC § 877A exit tax), they would become a Hong Kong resident for tax purposes. As an NRA, they would then be subject to the USD 60,000 exemption on US-situs assets. The non-discrimination article in a treaty would not apply to prevent this disparity because the US treats its own citizens differently from NRAs—a distinction that is inherent in the US tax system and not considered discriminatory under Article 24 of the OECD Model.

The Future: Treaty Negotiations and the “Most Favored Nation” Argument

The possibility of a comprehensive US-Hong Kong tax treaty has been discussed intermittently since the handover in 1997, but no formal negotiations have commenced. The US Treasury’s 2024 National Tax Treaty Policy Statement reaffirmed that treaty negotiations are a “multi-year process” and that the US prioritizes countries with which it has “significant economic relationships and a demonstrated commitment to tax transparency.”

The “Most Favored Nation” Provision in Existing Agreements. Some tax treaties contain a “most favored nation” (MFN) clause, which requires that if one contracting state enters into a more favorable treaty with a third state, the other contracting state can request the same benefits. The US-China Treaty does not contain an MFN clause. The US-Hong Kong TIEA also does not contain one. Therefore, even if the US were to enter into a comprehensive treaty with Hong Kong in the future, China could not automatically claim the same benefits under the US-China Treaty, and vice versa.

The OECD’s “Beps 2.0” and Its Impact on Hong Kong. The OECD’s Pillar Two rules, which introduce a global minimum tax of 15%, are scheduled to take effect in 2024-2025 for large multinational enterprises (MNEs). Hong Kong has implemented the Income Inclusion Rule (IIR) effective from 2025, applying to MNEs with consolidated group revenue of at least EUR 750 million. For a US national who controls a Hong Kong MNE, the non-discrimination provisions of the US Model Treaty are irrelevant because Pillar Two applies based on the entity’s global revenue, not the nationality of its owners. However, the interaction between Pillar Two and existing treaty non-discrimination articles is an active area of OECD commentary. The OECD’s 2023 Model Rules confirm that the IIR and Undertaxed Profits Rule (UTPR) are “subject to applicable tax treaties,” meaning that a non-discrimination article could potentially be invoked to prevent a jurisdiction from applying the UTPR to a Hong Kong entity if a domestic entity in the same circumstances would not be subject to it. For Hong Kong, which has no comprehensive treaty with the US, this protection is absent.

Actionable Takeaways

• Treaty protection is unavailable. A US national resident in Hong Kong cannot rely on Article 24 of the US-China Treaty or any provision of the US-Hong Kong TIEA to reduce US withholding taxes, branch profits tax, or estate tax rates.
• Restructure through a treaty jurisdiction. To access reduced US withholding rates, a Hong Kong-based US national should consider interposing a holding company in a jurisdiction that has a comprehensive treaty with the US, such as Singapore (US-Singapore Treaty, 30% withholding reduced to 0% for certain dividends) or Switzerland (US-Switzerland Treaty, 30% reduced to 0% for certain dividends), but must ensure the entity has sufficient economic substance to avoid anti-treaty shopping rules.
• Monitor the “same circumstances” test under Treas. Reg. § 1.1441-6. For a US citizen who can establish Chinese treaty residence (e.g., by maintaining a Mainland tax residence certificate), a claim for reduced withholding under the US-China Treaty may be possible, but the IRS’s position in Revenue Ruling 2004-76 makes this a high-risk strategy requiring professional guidance.
• Prepare for Pillar Two compliance. For US nationals controlling Hong Kong MNEs with EUR 750 million+ revenue, the absence of a non-discrimination article in a US-HK treaty means the IIR and UTPR will apply in full from 2025, requiring a global tax compliance infrastructure.
• Renunciation is the only “equal treatment” option, but with severe costs. A US citizen who renounces citizenship under IRC § 877A becomes a non-resident alien and can access the USD 60,000 estate tax exemption, but must pay an exit tax on unrealized gains exceeding USD 866,000 (2024 threshold) and may face a 10-year “covered expatriate” rule under IRC § 2801.

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.