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 Chief Secretary has indicated that in the near future the territory may negotiate and execute comprehensive double taxation treaties with some foreign countries. Under article 151 of the Basic law the territory can in any event negotiate its own double taxation treaties independently of China using the abbreviation Hong Kong, China.
Hong Kong has entered into limited double taxation agreements in relation to shipping activities with the USA & Netherlands - the latter is now in force and will be implemented from 1 January, 2002 - and in relation to air activities with Belgium, Canada, Germany, Israel, Mauritius, the Netherlands, New Zealand, the Russian Federation, South Korea and the United Kingdom.
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.
Under these treaties provisions exist for an employee's Hong Kong source income to be exempted from tax in Hong Kong where it has already been taxed in another jurisdiction.
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 ship-owners as it exempts Hong Kong ship-owners 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.
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 also has a number of Air Services Agreements which contains a provision on double taxation relief in respect of airline income and profits, and provide a legal framework for establishing air links between Hong Kong and the country involved. The most recent Agreement was signed with Estonia on 10 July, 2001
Hong Kong has previously signed air services agreements with Australia, Austria, Bahrain, Belgium, Brazil, Brunei, Canada, 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 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.
"We have been conducting negotiations with some European countries," a spokeswoman for the Financial Services and Treasury Bureau confirmed. "Negotiations with some Asian countries have been planned for 2004," she added, without divulging which countries have been approached by the government.
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