Hong Kong's DTA Network Expands

by Mary Swire, Tax-News.com, Hong kong

Tuesday, February 07, 2012

Hong Kong’s double taxation agreement (DTA) with the Czech Republic, signed on June 6, 2011, came into force on January 24 this year, while that with Spain, signed on April 1 last year, will come into effect on April 16, now that ratification procedures have been completed on all sides.

Each of the DTAs, which will apply in Hong Kong for any year of assessment beginning on or after April 1, 2013, clearly sets out the allocation of taxing rights between the jurisdictions and the relief on tax rates on different types of passive income. It is hoped that they will help investors better assess their potential tax liabilities from cross-border economic activities, and will boost closer economic and trade ties.

In the absence of the DTAs, income earned by Czech and Spanish residents in Hong Kong is subject to Hong Kong, Czech and Spanish income taxes, and profits of Czech and Spanish companies doing business through a branch in Hong Kong are fully taxed in both places. Under each agreement, tax paid in Hong Kong will be allowed as a credit against either Czech or Spanish tax payable.

In addition, under the DTAs, the withholding tax payable by Hong Kong residents receiving dividends from the Czech Republic and Spain, not attributable to a permanent establishment in the Czech Republic or Spain, will be capped at 5% and 10% respectively.

Hong Kong residents will also be exempted from Czech withholding tax on interest, while the cap on Spanish withholding tax on interest will be 5%; and the Czech and Spanish withholding tax on royalties will be capped at 10% and 5% respectively.

Under the DTAs, Hong Kong airlines operating flights to the Czech Republic and Spain will be taxed at Hong Kong's corporation tax rate (which is lower than that of both the Czech Republic and Spain). Profits from international shipping transport earned by Hong Kong residents that arise in the Czech Republic and Spain, which are currently subject to tax there, will not be taxed under the agreements.

In addition, both DTAs have also incorporated the latest Organization for Economic Co-operation and Development standard on exchange of tax information.