HONG KONG: DOUBLE TAX TREATIES

- HONG KONG TAXATION
- HONG KONG DIRECT CORPORATE TAXATION
- HONG KONG PERSONAL TAXATION
- HONG KONG OFFSHORE TAXATION REGIMES

Double taxation avoidance treaties are in force between Hong Kong and the following countries (with 'in force' dates):

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.

In April 2010, Commissioner of Inland Revenue, Chu Yam-yuen, said that Hong Kong has entered a new phase in supporting the international effort to enhance tax transparency, and its next hurdle is to sign at least twelve comprehensive double taxation agreements (DTAs).

Legislation which came into operation in March 2010 allows Hong Kong to enter into comprehensive DTAs, incorporating the Organisation for Economic Cooperation and Development (OECD) international standard on exchange of information.

There had been some concern within Hong Kong that the territory may become 'black listed' by the OECD, or be on the receiving end of sanctions for failing to implement the internationally agreed standard on tax transparency and information exchange confirmed at the April 2009 G20 Summit in London. Secretary for Financial Services and the Treasury, Professor K C Chan assured lawmakers in May 2010 however, that the OECD had in fact commended Hong Kong's efforts to comply with these international standards.

March 2010 was a busy month for Hong Kong's tax treaty negotiators, agreements having been signed with Brunei, the Netherlands and Indonesia. Hong Kong also initialled a DTA with Liechtenstein and agreed to commence negotiations towards a tax treaty with Malaysia. A tax treaty with Japan awaits signature.

For information on Hong Kong Salaries Tax, see Hong Kong Personal Taxation.

For information on Hong Kong Profits Tax, see Hong Kong Domestic Corporate Taxation.

Other Recent Agreements

The following information describes some of the tax agreements entered into by Hong Kong since 2001:

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 May 3, 2001, the provisions of the agreement applied in the UK from April 1, 2002, for corporation tax, and from April 6, 2002, for income tax and capital gains tax. It applied in the SAR from April 1, 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:

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."

Prior to the agreement, 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 was 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 was reduced from 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 were subject to income tax in Belgium were exempted 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 hoped that the Belgian treaty would 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 did not apply to firms in the service industry, nor 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 warned that a comprehensive new agreement would likely include a tax information exchange provision, which could mean coming under greater scrutiny from the Chinese tax authorities. They also warned 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 was the first comprehensive agreement for the avoidance of double taxation that Hong Kong 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 provides certainty in tax liability and brings 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:

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."

The new arrangement came 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 applies from the taxable year beginning on or after January 1, 2007.

In early 2008, Hong Kong and the Mainland have signed the second protocol to the Arrangement for the Avoidance of Double Taxation & Prevention of Fiscal Evasion with respect to Taxes on Income. Hong Kong's Secretary for Financial Services & the Treasury, Professor KC Chan signed the agreement with Deputy Taxation Commissioner Wang Li in Beijing this week, further clarifying which Hong Kong firms should pay Enterprise Income Tax on the Mainland.

The tax arrangement was formally signed on August 21, 2006, and launched on December 8 that year, but the two governments differed on the interpretation of certain parts of it. After negotiations, they agreed on the amendments and initialled the second protocol in September 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.

An order made by the Chief Executive in Council under the Inland Revenue Ordinance to implement the Agreement with Luxembourg for the Avoidance of Double Taxation was gazetted on February 1, 2008.

Under the agreement:

In December 2008, it was announced that Hong Kong had signed double taxation avoidance agreements with Kuwait and Vietnam.

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