Hong Kong s Double Tax Treaty Network

Transcription

1 TAX FLASH July 2010 TAX FLASH July 2010 Hong Kong s Double Tax Treaty Network To remain as an international financial and commercial centre, it has become important for Hong Kong to promote its transparency in tax administration and become a double tax treaty network jurisdiction in the international community. Hong Kong government is now committed to entering into more comprehensive double taxation agreements ( CDTAs ) with other major trade and investment countries. To expand its CDTA s network, Hong Kong has aligned its Exchange of Information ( EoI ) arrangements with the international standard. The Inland Revenue (Amendment)(No.3) Bill and the Disclosures Rules were passed on 6 January 2010 and 3 March 2010 respectively. And so the Inland Revenue Department ( IRD ) is now allowed to collect and disclose taxpayers information in response to requests made by treaty partners even when the information is not required for domestic tax purposes. In June 2010 the IRD also issued Departmental Interpretation and Practice Notes No. 47 ( DIPN 47 ) explaining the disclosure requirements and the procedural guidelines to be followed. This Tax Flash highlights some key features of those CDTAs signed in 2010 as well as the IRD s position on the EoI; and a discussion how these measures will help Hong Kong s economy. Hong Kong CDTAs signed in 2010 Under the new EoI regime, the Government is actively conducting CDTAs negotiations with other trade and investment countries. By the end of June Hong Kong had signed CDTAs with the following countries in 2010: Treaty Partner Country Date signed # Brunei 20 March 2010 Netherlands 22 March 2010 Indonesia 23 March 2010 Hungary 12 May 2010 Kuwait 13 May 2010 Austria 25 May 2010 United Kingdom 21 June 2010 Ireland 22 June 2010 #Date of order and date of becoming into force await ratification.

2 In addition a consensus on CDTA was reached with Japan on 31 March The Government is also re-negotiating with existing treaty partners (i.e. the PRC, Belgium, Vietnam, Luxembourg and Thailand) to upgrade the existing EoI standards. Key Features of the New CDTAs i) Passive income The following table summarises the rate(s) (Note) on dividends, interest and royalties applicable to Hong Kong tax residents:- Treaty Partner Dividends Interest Royalties Country Non-treaty Non-treaty Treaty rate Treaty rate Non-treaty Treaty rate rate rate rate Brunei 0% 0% 15% 10%/5% (a) 10% 5% Netherlands 15% 0/10% (b) 0% 0% 0% 0%/3% (c) Indonesia 20% 5%/10% (d) 20% 10% 20% 5% Hungary 25% 5%/10% (e) 30% 5% 30% 5% Kuwait 15% 5% 0% 0% 15% 5% Austria 25% 0%/10% (f) 0% 0% 20% 3% Japan 7%/10%/ 5%/10% (g) 15%/20% 0%/10% (h) 20% 5% 20% United Kingdom 20% 15% 20% 0% 20% 3% Ireland 20% 0% 20% 10% 20% 3% Note (a) (b) If the recipient is a bank or financial institution, the tax rate that applies to interest payments is 5%. A rate of 10% applies in all other cases. A rate of 0% applies to dividends received by: i) the Hong Kong company which holds directly at least 10% of the capital of the company paying the dividend, provided that: - the shares of the company receiving the dividends are regularly traded on a recognised stock exchange; or - at least 50% of the company receiving the dividends is owned by a company the shares of which are regularly traded on a recognised stock exchange and that company is the resident of either contracting party or is the resident of the member of State of the European Union. ii) banks and insurances companies; a contracting party, or political subdivision or local authority thereof; an institution created by the Government of a contracting party or a political subdivision or local authority thereof; pensions funds; headquarter companies for a multinational corporate group and certain other qualifying companies. (c) (d) There is no on royalties in the Netherlands. If there were a on royalties, the tax rate is capped at 3%. If the recipient is a company holding 25% of the share capital of the paying company, a 5% tax rate is applied. A rate of 10% would apply in all other cases. 2

3 (e) (f) (g) (h) If the recipient is a company holding 10% or more of the share capital of the paying company, the withholding tax rate is reduced to 5%. If a company holding directly at least 10% of the capital of the company paying dividends, is exempted. A rate of 10% would apply in all other cases. The rate is capped at 5% if one company holds at least 10% of the voting shares of the paying company. A rate of 10% would apply in all other cases. The rate on interest is exempt for government institutions and capped at 10% for others. ii) Permanent Establishment ( PE ) Similar to the CDTAs previously signed, the PE in respect of services is defined as the furnishing of services, including consultancy, performed for the same/connected project(s) through one or more individuals who are present and performing such services in that other contracting party for a period or periods exceeding: days in any 12 months for Brunei, Netherlands, Indonesia, Hungary, Austria, United Kingdom and Ireland; and days in any 12 months for Kuwait. In addition the PE relating to the Netherlands CDTA includes the criterion that more than 50% of the gross revenues attributable to active business activities of the enterprise during the period or periods are derived from the services performed in that other contracting party through that individual, regardless of whether the activities are related to the same/connected project(s). iii) Capital gain on shares Under the new CDTAs no capital gains tax will be imposed on gains derived from the transfer of shares. However gains derived by a resident of a contracting party from the transfer of shares of a company deriving more than 50% of its asset value directly or indirectly from immoveable property situated in other contracting party may be taxed in that other party. iv) Technical fees Under Brunei s CDTAs technical fees mean payments of any kind to any person, other than to an employee of the person making the payments, in consideration for any services of a technical, managerial or consultancy nature. The rate for technical fees in Brunei is 20%. Under the CDTAs if the beneficial owner of the technical fees is a resident of the other contracting party, the tax rate is capped at 15% of the gross amount of the technical fee. v) International transportation - International air transportation Hong Kong airlines operating flights to Indonesia, Austria, Brunei, Ireland and Hungary will be taxed at Hong Kong s corporation tax (i.e. lower than that of the treaty partner countries). 3

4 - International shipping transportation Profits from international shipping transport earned by Hong Kong residents that arise in Hungary, Brunei, Ireland and Kuwait will enjoy tax exemption under the CDTAs; while 50% reduction in tax will apply in Indonesia. In addition the CDTA between Hong Kong and United Kingdom will replace and supersede existing limited double taxation avoidance agreements for airline and shipping income. vi) Exchange of Information The new CDTAs have adopted the 2004 version of the OECD EoI standards. In June 2010 the IRD issued DIPN 47 to illustrate their view regarding disclosures requests and administration procedures. DIPN 47 states that the provision of the OECD Model allows information to be exchanged in 3 different ways: i) upon request; ii) automatically; and iii) spontaneously or any combination of the above 3 models. However under Hong Kong s policy, EoI is restricted to an exchange upon request. Hong Kong only authorises the EoI and the use of information exchanged in relation to the administration and enforcement of taxes covered by the CDTAs. Information exchanged shall only be used for tax purposes. Under the safeguards provided under new CDTAs the information shall only be disclosed to persons or tax authorities of the requesting jurisdiction. In other words no information shall be disclosed to any other person or entity or authority or any other jurisdiction. In addition any information relating to any tax period prior to the effective date of the CDTAs shall not be disclosed. A disclosure request made under an EoI article in the CDTAs may only be approved by the Commissioner of the Inland Revenue ( the Commissioner ), or chief assessor or above, of the IRD authorised in writing by the Commissioner. Prior to the disclosure of any information in response to the disclosure request, the Commissioner must notify the person to whom the information requested is related in writing about the disclosure. If a person makes a request for a copy of the information to be disclosed, the Commissioner must provide the person with a copy of the information that the Commissioner is prepared to disclose to the requesting government. The person may request the Commissioner to amend any part of the information to be exchanged by written notice within 21 days after the date of the notice if the information does not relate to that person or such information is factually incorrect. If the Commissioner refuses to the amendment of information for the disclosure request, the person can request the Financial Secretary to make a direction. In general the person must specify the information to be amended; the grounds for the request together with a copy of the Commissioner s notice; and any supporting documentary evidence. A written decision together with the reasons therefore will be given to the person. The decision of the Financial Secretary is final. 4

5 Prior to the disclosure request, the authorised officer (i.e. the Commissioner) must comply with the following provisions or procedures before approving the request:- i) the provisions of the relevant arrangements that are applicable to the request; ii) any procedures applicable to the request that may be specified in any instrument that amends or supplements the relevant arrangement; and iii) the particulars prescribed in the Schedule to the Disclosure Rules. The response for the disclosure request set by the OECD is 90 days and must be made in writing and made by the competent authority of the requesting party as set out in the relevant CDTAs under which the request is made. If there are any delays for the provision of the information within 90 days, the IRD must inform the requesting competent authority and explain the reasons for not being able to provide the information within the prescribed period. Opportunities for Hong Kong CDTAs provide certainty to investors on the taxing rights of the contracting parties and help investors to better assess their potential tax liabilities for international cross-border transactions. As a result the tax exposure of Hong Kong residents and residents of the treaty partner countries become more transparent and any potential double tax burdens between the contracting parties will be avoided. Developing a comprehensive double tax treaty network enhances Hong Kong s competitive advantage as the PRC s financial gateway to the world for both inbound and outbound investments. i) PRC s financial gateway to the World Under the CDTAs between Hong Kong and its treaty partner countries, preferential rates are granted to Hong Kong residents. As a result dividend income (after ) received by a Hong Kong intermediate holding company would generally be the same as the amount received by a PRC company. Dividend income is not taxable in Hong Kong and there is no on dividends repatriated from Hong Kong. Therefore, no further tax is imposed when the funds are repatriated to the PRC investors. Subject to the controlled foreign corporation rules in China, having an intermediate Hong Kong holding company may help to defer the PRC corporate income tax on dividend income. 5

6 Furthermore, in light of the foreign exchange control regulations in China, it is generally preferred to locate funds outside China for future investment and other purposes. PRC Company PRC Company Dividend with no withholding tax Direct investment Foreign company DTA rates HK Company (intermediate holding company) Foreign company (those countries signed CDTAs with HK) DTA rates ii) Foreign investors gateway to China Hong Kong has a close and unique relationship with China which has made Hong Kong a main portal for overseas investors to invest in the PRC. In light of the preferential tax arrangements between China and Hong Kong as well as the further liberalisation measures of Mainland and Hong Kong Closer Economic Partnership Arrangement ( CEPA ) in 2010, Hong Kong is an optimal location for treaty partner countries to set up immediate holding companies for their investments in the PRC. Foreign company (those countries signed CDTAs with HK) Preferential rates HK Company PRC Company Preferential rates & CEPA Hong Kong and China signed the main text of CEPA in During 2003 to 2009 Hong Kong and the PRC updated and signed 6 CEPA Supplements. Supplement 7 was also signed in

7 CEPA now provides 27 liberalization measures in 14 services sectors which includes construction; medical services; technical testing; analysis and product testing; specialty design; audiovisual services; distribution; banking; securities; social services; tourism; cultural services; air transport; qualification examinations for professional and technicians; and individually owned stores. CEPA also identifies other measures for early and pilot implementation. Conclusion Hong Kong will remain China s international gateway. The question of beneficial ownership and indirect transfer of PRC equity interest are topical tax issues currently in China (please refer to our Tax Flash February 2010 for details). Foreign investors who set up an intermediate holding company in Hong Kong with commercial substance will enjoy the preferential rate benefit under the China-Hong Kong tax arrangement and be able to take advantage of the early market entry/lower entry barrier under CEPA. For Chinese investors, using a Hong Kong company for outbound investment is a tax efficient and an operational effective structure in light of Hong Kong s extensive CDTA network of Hong Kong. In addition there are no exchange controls, while the legal system, banking practices and infrastructure are second to none. 7