May 2015 - Comprehensive Double Taxation Agreements with South Africa and United Arab Emirates

KEY FEATURES

From the perspective of Hong Kong residents, the key features of the CDTAs are as follows:

PERSONS COVERED

Individuals

Under the CDTAs, an individual qualifies as a Hong Kong resident if:

• He/she is a permanent resident, i.e. he/she ordinarily resides in Hong Kong (e.g. he/she has a permanent home in Hong Kong); or
• He/she is a temporary resident, i.e. he/she stays in Hong Kong for more than 180 days during a tax year, or for more than 300 days in 2 consecutive tax years, one of which is the relevant tax year.

Corporations

Companies incorporated in Hong Kong and companies incorporated outside Hong Kong but normally managed and controlled in Hong Kong would be regarded as Hong Kong residents under the CDTAs.

SALARIES INCOME

Income from employment

• A Hong Kong individual is exempted from tax in the treaty partner if he/she satisfies the following conditions:
• He/she is present in the treaty partner for not more than 183 days in any 12-month period commencing or ending in the tax year;
• His/her remuneration is paid by, or on behalf of, an employer who is not a resident of the treaty partner; and
• His/her remuneration is not borne by a permanent establishment maintained by his/her employer in the treaty partner.

Directors’ fees

Directors’ fees derived by a Hong Kong resident in the capacity of a member of the board of directors of a company in the treaty partner may be taxed in the treaty partner.

BUSINESS INCOME

Active business profits

Under the business profits article, only profits attributable to the permanent establishment maintained by a Hong Kong enterprise in the treaty partner will be taxable in the treaty partner.

Associated enterprises (Transfer pricing)

The CDTAs contain an associated enterprises article which allows Hong Kong or its treaty partners to make transfer pricing adjustments for transactions between associated enterprises.  Such adjustments may give rise to potential double taxation.  In such case, the article also provides that the tax authorities are obliged to make an appropriate adjustment in order to relieve the double taxation.

CAPITAL GAINS

In general, under the CTDAs, Hong Kong has a taxing right on gains derived from disposal of capital assets by a Hong Kong company except if:

• The properties are immovable properties situated in the treaty partner
• The properties are movable properties of a permanent establishment maintained by the Hong Kong enterprise in the treaty partner
• The properties are shares of a company in the treaty partner, of which more than 50% of its asset value (either directly or indirectly) are derived from immovable properties situated in the treaty partner

WITHHOLDING TAX ON PASSIVE INCOME

The CDTAs offer favorable withholding tax rates on passive income.  The relevant withholding tax rates for dividends, royalties and interest under the CDTAs are summarized as follows:

Non-treaty rates

Treaty rates

(1)    4.5% if received by an unincorporated business; 4.95% if received by a corporation.

(2)    In practice, the tax decrees issued by the individual Emirates have been applied to impose tax only on oil and gas producing companies and branches of foreign banks.

(3)    5% if the beneficial owner is a company which holds directly at least 10% of the capital of the company paying the dividends; 10% in all other cases.

BENEFICIAL OWNER TEST AND LIMITATION ON BENEFITS

It should be noted that when claiming preferential withholding tax rates under the CDTAs, the recipient has to satisfy the beneficial owner test, i.e. the recipient must be the beneficial owner of the passive income.

The CDTAs also contain provisions to counteract treaty shopping activities.  If the main purpose or one of the main purposes of any person involved in the arrangement is to take advantage of the treaty benefits applicable to passive income, capital gains or other income, the treaty benefits will be denied.

EXCHANGE OF INFORMATION ("EOI")

The EOI article provides that the competent authorities of Hong Kong and the treaty partners shall exchange information that is foreseeably relevant for carrying out the provisions of the CDTAs or to the administration or enforcement of the domestic laws of Hong Kong or the treaty partners.