By Leo Zhang
On June 3, the agreement for the avoidance of double taxation (DTA) between Hong Kong and Portugal, signed on March 2, 2011, came into force after obtaining approval from authorities on both sides.
The DTA, which specifies the taxation rights of Hong Kong and Portugal, will also offer preferential tax rates on a raft of passive incomes. Analysts said that the deal could prompt investors, especially those in the Chinese mainland, to use Hong Kong as a gateway to explore Portugal as cross-border economic activities and trade links between the two territories strengthen. This brought the number of DTAs Hong Kong has concluded with other jurisdictions to nineteen.
Under the arrangement, the withholding tax rate on dividends received by Hong Kong investors from Portugal has been slashed from 21.5 percent to 10 percent. The rate will be further cut to five percent if the beneficial owner of the dividends is a company, instead of a partnership, that holds directly at least ten percent of the capital of the entity paying the dividends.
Based on the DTA, the Portuguese withholding tax on interest paid to Hong Kong investors is also cut to 10 percent from 21.5 percent. The interest is exempt from withholding tax when it is paid to the Hong Kong government and some government-related agencies including the Hong Kong Monetary Authority.
In addition, the Portuguese withholding tax on royalties transferred to Hong Kong is capped at five percent.
Hong Kong-based air carriers operating flights to Portugal will be taxed at Hong Kong's corporate tax rates, which are lower than in Portugal, and profits derived from Portugal in the global shipping business run by Hong Kong residents, will no longer be subject to tax.
The DTA between Hong Kong and Portugal has also incorporated the widely-accepted Organization for Economic Co-operation and Development standard on the exchange of tax information. It will take effect in Hong Kong for any year of assessment beginning on or after April 1, 2013. In Portugal, the DTA will take effect on January 1, 2013.
nvestors have another choice in doing business in Portugal and other countries in Europe, said Martin Luo, an investment adviser with Bank of Communications. referential tax policies Hong Kong companies can get may prove a selling point for mainland investors. /p>
According to a research alert by Ernest and Young, the deal means that active business profits of a Hong Kong resident enterprise will not be liable to tax in Portugal unless they are attributable to a permanent establishment (PE) maintained by the Hong Kong enterprise in Portugal. Where a Hong Kong enterprise has maintained a PE in Portugal, only profits attributable to the PE would be liable to tax in Portugal.
The accounting company said that a Hong Kong resident enterprise will not be liable to tax in Portugal if it simply maintains a buying office in Portugal, which only makes purchases for the Hong Kong resident enterprise.
lients who have significant investments outside their own jurisdiction, especially those in the EU, should consider whether it is desirable to leverage Hong Kong expanding DTA network when considering the location of their regional holding or operational companies, Ernest and Young said in the alert.
