Hong
Kong Double Tax Treaties
Until June 2001 (see below) the territory
had no comprehensive double taxation agreements
in place. Since under the "territorial
principle" only Hong Kong source income
is taxable the double taxation of income does
not usually occur thereby obviating the need
for double taxation treaties. However the
government is now entering an increasing number
of tax treaties of various types. Under article
151 of the Basic Law the territory can negotiate
its own double taxation treaties independently
of China using the abbreviation Hong Kong,
China. The territory is not able to take advantage
of any double taxation treaties which China
may enter into because only mainland taxes
are mentioned in these treaties. Nor will
China impose the terms of any double taxation
treaties on the territory given that under
articles 106-108 of the Basic Law it guaranteed
Hong Kong the right to maintain an independent
taxation system free of interference from
the mainland until the year 2047.
Hong
Kong has entered into limited double taxation
agreements in relation to shipping activities
with Mainland China, the US, the UK, the Netherlands,
New Zealand, the Republic of Korea and Germany,
and in relation to air activities with Australia,
Austria, Bahrain, Belgium, Brazil, Brunei,
Canada, Estonia, France, Germany, India, Indonesia,
Israel, Italy, Japan, Luxembourg, Malaysia,
Mauritius, Myanmar, Nepal, the Netherlands,
New Zealand, Pakistan, Papua New Guinea, the
Philippines, the Republic of Korea, Oman,
Qatar, Russia, Singapore, Sri Lanka, Switzerland,
Thailand, Turkey, the United Arab Emirates,
the United Kingdom, the USA and Vietnam.
In
June 2001, Hong Kong also entered into an
limited agreement with the United Kingdom
covering shipping transport. The agreement
is limited to revenues from international
shipping transport and provides that profits
derived from such business by an enterprise
of the UK or the SAR are exempt from tax in
the territory of the other contracting party.
Entering into force on 3 May 2001, the provisions
of the agreement applied in the UK from 1
April 2002, for corporation tax, and from
6 April 2002, for income tax and capital gains
tax. It applied in the SAR from 1 April, 2002.
In
October, 2003, a shipping transport agreement
was signed with Norway. Secretary for Economic
Development and Labour, Mr Stephen Ip, said:
The agreement is beneficial to both
Hong Kong and Norway shipowners as it exempts
Hong Kong shipowners from paying tax levied
on cargo loaded in Norway, and vice versa.
It also strengthens Hong Kong's status as
an international shipping centre."
In December, 2003, Singapore and Hong Kong
signed an agreement for the avoidance of double
taxation with regard to airline and shipping
operations in both countries. Under the terms
of the agreement, signed by Singapore's Second
Finance Minister, Lim Hng Kiang, and Hong
Kong's Secretary for Economic Development
and Labour, Stephen Ip, Hong Kong will no
longer tax Singapore shipping and airline
operations on income gained from picking up
passengers and cargo in the territory, and
vice versa. Mr Lim explained that: "With
the high volume of movement of goods and frequency
of business travel between Singapore and Hong
Kong, shipping and air transport are key components
of our economic relations." No time frame
has yet been given for the agreement between
the two countries to come into force.
There
is also a memorandum of understanding with
China under which:
- Chinese
source income earned by Hong Kong based
shipping, aviation and land transport
operations is exempt from tax on the mainland;
-
Hong Kong enterprises are only taxable
in China if they have a permanent establishment
there.(A permanent establishment is defined
as an activity which continually lasts
for more than 6 out of 12 months).
- Hong
Kong resident individuals are not subject
to tax for services rendered in mainland
China so long as they do not reside more
than 183 days in the country in any tax
year.
- Hong
Kong will give a tax credit for any tax
paid in mainland China.
In
July, 2003, Hong Kong and India reported that
they would soon sign a limited double taxation
treaty which will exempt shipping companies
and airlines from having to pay income tax
in both countries.
In
December, 2003, the governments of Hong Kong
and Belgium signed a double taxation and prevention
of fiscal evasion treaty marking the first
comprehensive double taxation agreement concluded
by the government of the Special Administrative
Region. Signing the agreement on behalf of
the Hong Kong administration, the Secretary
for Financial Services and the Treasury Frederick
Ma noted that the treaty ensures that
investors will not have to pay tax twice on
a single source of income. In simple terms,
the Agreement will translate into tax savings
to Belgian and Hong Kong investors doing business
in each other's areas, through the allocation
of taxing rights between the two places and
the provision of tax relief in case of double
taxation."
Currently,
royalties received by a Hong Kong resident
from a Belgian source not attributable to
a permanent establishment in Belgium are subject
to a Belgian withholding tax at 15% on the
gross amount of royalties less a 15% fixed
deduction. Under the Agreement, the Belgian
withholding tax will be reduced to 5% of the
gross amount of royalties (without the 15%
fixed deduction). In the case of interest
received by a Hong Kong resident that arises
in Belgium and which is not attributable to
a permanent establishment in Belgium, the
Belgian withholding tax will be reduced from
the current 15% of the gross amount of interest
to 10% under the Agreement.
Profits
from international shipping transport earned
by Hong Kong residents that arise in Belgium
which are currently subject to income tax
in Belgium will also enjoy exemption under
the Agreement. "The Agreement also formalises
the tax relief being offered by the two tax
authorities at present, thus providing a further
level of certainty and stability to existing
and potential investors alike," Mr Ma
said.
The
government of the SAR is hoping the Belgian
treaty will represent the first of a network
of similar agreements it wants to conclude
in the future.
"Many
places in the region have already established
a network of CDTAs. Having such a network
in place for Hong Kong will put us on a par
with other places in the region that already
have one, thereby further enhancing our competitiveness
in attracting foreign investment," Mr
Ma explained.
In
November, 2004, the government announced that
it had gazetted four new orders giving effect
to agreements for avoidance of double taxation
on income from shipping and air transport
with Germany, Norway, Singapore and Sri Lanka.
In June, 2005, seven further orders were gazetted
giving effect to agreements for the avoidance
of double taxation, with Denmark, Switzerland,
Finland, Kuwait, Kenya, Iceland and Jordan.
The
Government entered into an Agreement for the
Avoidance of Double Taxation with respect
to Taxes on Income from Shipping Transport
with Denmark on December 9, 2004.
By
way of exchange of letters, the Government
reached agreement with Switzerland and Finland
in July and September 2004 respectively to
amend the respective Air Services Agreements
(ASAs) previously signed with Hong Kong to
include a DTA article.
Separately,
the HKSAR entered into ASAs with a Double
Taxation Avoidance Article with Kuwait, Kenya,
Iceland and Jordan on April 7, May 21, August
9 and August 28, 2004 respectively.
In
July, 2005, Hong Kong said it was seeking
to negotiate a comprehensive double taxation
treaty with China in order to clarify the
tax rules and ease the tax burden for the
growing number of companies based in the territory
which are doing business with the mainland.
In
a speech to the Hong Kong Federation of Industries,
Secretary for Financial Services and the Treasury
Frederick Ma Si-hang revealed that officials
from Hong Kong's Inland Revenue Department
were due to meet with their counterparts on
the mainland in September for preliminary
discussions which could lead to a comprehensive
overhaul of the existing tax relief measures
in place between China and Hong Kong.
Under
the tax agreement put in place in 1998, Hong
Kong firms with manufacturing operations in
China are permitted to split their profits
equally between the two jurisdictions, while
individuals are granted relief from double
taxation. However, the tax agreement does
not currently apply to firms in the service
industry, nor does it extend to withholding
taxes on interest, royalties and dividends.
"The
negotiations will expand the scope of the
agreement to save Hong Kong and mainland companies'
cross-border operations from double taxation,"
Mr Ma explained.
"This
will ensure Hong Kong's competitiveness and
encourage more international investors to
use Hong Kong as a springboard for their China
investments," he added.
While
this is likely to result in considerable tax
savings for Hong Kong-based firms doing business
in China, tax experts nevertheless warn that
a comprehensive new agreement is likely to
include a tax information exchange provision,
which could mean coming under greater scrutiny
from the Chinese tax authorities. They also
warn that it could result in a crackdown on
transfer pricing.
In
September, 2005, Frederick Ma signed an agreement
for the avoidance of double taxation with
the Thai Foreign Minister Kantathi Suphamongkon
in Bangkok.
This
is the first comprehensive agreement for the
avoidance of double taxation that Hong Kong
has concluded with an Asia-Pacific economy,
and the second since the Government began
exploring establishing a network of agreements
with major trading partners in 1998. The first
was signed in 2003 with Belgium. The agreement
will provide certainty in tax liability and
bring tax savings to Hong Kong investors in
Thailand.
"The
Government is keen to establish a network
of comprehensive agreements for the avoidance
of double taxation with Hong Kong's trading
partners, as these agreements would provide
certainty and stability to investors, and
enhance trade and economic ties with other
economies," Mr Ma noted.
Hong
Kong has also been holding talks on the avoidance
of double taxation with Macau, Vietnam and
some member economies of the Organisation
for Economic Co-operation and Development.
In
August, 2006, the Chinese and Hong Kong Governments
signed an agreement on avoiding double taxation
that aims to provide investors and taxpayers
in the two places certainty over tax liability
and offer tax savings.
State
Administration of Taxation Minister Xie Xuren
signed the new arrangement on behalf of the
Central Government, and Chief Executive Donald
Tsang, accompanied by Financial Secretary
Henry Tang and Secretary for Financial Services
& the Treasury Frederick Ma, signed on behalf
of Hong Kong.
The
Arrangement for the Avoidance of Double Taxation
on Income & Prevention of Fiscal Evasion extends
the scope of the original agreement on business
profits and income from personal services
both parties signed in 1998.
The
new pact covers direct income, such as operating
profits and employment income, and indirect
income, such as dividends, interest and royalties.
It also ensures the same income will not be
doubly taxed in the two places.
Under
the new arrangement:
- Top
rates for withholding tax for dividends
a Hong Kong resident receives from Mainland
investments will be halved from 20% to
10%, and those rates for dividends a Hong
Kong business receives will fall from
10% to 5%, if the Hong Kong business holds
at least 25% of the capital of the Mainland
enterprise. This will attract more overseas
investments into the Mainland through
Hong Kong.
- Top
rates for withholding tax for interest
a Hong Kong resident receives from the
Mainland will fall from 20% to 7%, and
those for a Hong Kong business will dip
from 10% to 7%.
- Top
rates for withholding tax for royalties
a Hong Kong resident or business receives
from the Mainland will also slide, from
the respective 20% and 10% to 7%. This
will help promote creativity and innovation
in industry as well as cultural and artistic
activities on the Mainland and Hong Kong.
- The
taxing right for gains a Hong Kong resident
or business receives from the transfer
of shares in a Mainland enterprise is
allocated exclusively to Hong Kong. If
the income does not amount to a trading
receipt or is not sourced in Hong Kong,
no profits tax will be charged here. Where
the assets of the Mainland enterprise
are comprised mainly of immovable property
on the Mainland or the shares transferred
are equal to or exceed 25% of the shareholding
of the Mainland enterprise, the income
may be taxed in both places. A tax-credit
arrangement will ensure that the same
income will not be taxed twice.
The
pact allows for the exchange of information
between the State Administration of Taxation
and Hong's Inland Revenue Department, to enable
both parties carry out its provisions. As
is the international norm, however, the exchange
is limited, to ensure that the use of taxpayer
information will not be abused.
Speaking
with regard to the new agreement, Donald Tsang
announced that:
"The
conclusion of a comprehensive double-taxation
arrangement with the Mainland, together with
the Mainland & Hong Kong Closer Economic Partnership
Arrangement, will provide added incentives
for international investors to enter the Mainland
market through Hong Kong. It will also enhance
cross-border financing arrangements and the
transfer of technical know-how and patent
rights between the two places. These will
help promote Hong Kong's economy, enhance
our competitiveness and attract overseas capital."
Both
sides need time to ratify the new arrangement.
In Hong Kong, the Chief Executive in Council
will make an order under the Inland Revenue
Ordinance, subject to the Legislative Council's
negative vetting.
If
both parties rafity the pact before December
31, the new arrangement will come into effect
with respect to Hong Kong taxes from the year
of assessment beginning on or after April
1, 2007. With respect to Mainland taxes, it
will apply to the taxable year beginning on
or after January 1, 2007.
The
European Union is persisting in its attempts
to convince Asian financial centres to cooperate
on the issue of information-sharing for tax
purposes, although the EU's pleas seemingly
continue to fall upon deaf ears.
Thomas
Roe, the European Commission's envoy to Hong
Kong and Macau, approached the two governments
in November, 2006, after Hong Kong and Singapore
refused to discuss the possibility of their
inclusion in the EU Savings Tax Directive.
While
the EU is very keen to tax the savings and
investments that European residents have shifted
to Asia to escape the clutches of the directive,
the Asian financial hubs are unlikely to want
to sign up to anything that would compromise
their status as low tax and lightly regulated
jurisdictions.
Hong
Kong and Luxembourg have signed a comprehensive
agreement on the avoidance of double taxation,
the fourth such agreement concluded by Hong
Kong.
The
agreement was signed on November 2, 2007,
by Secretary for Financial Services and the
Treasury, Professor KC Chan and Luxembourg
Economy and Foreign Trade Minister, Jeannot
Krecke. It will eliminate double taxation
instances encountered by Hong Kong and Luxembourg
investors, and bring about tax savings and
certainty in tax liabilities in connection
with cross-border economic activities.
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