By Juliet Leclerec
As the new fiscal year began April 1 in Hong Kong, nine new agreements have begun to apply to Hong Kong earned income. According to the region internal revenue department, treaties with Austria, France, Hungary, Ireland, Japan, Lichtenstein, Netherlands, and New Zealand will start to be effective for the 2012/2013 tax year, as well as a new protocol added to the treaty with Luxembourg. Additionally, a tax treaty signed one year ago with Spain will also enter into force April 16. Hong Kong ever expanding network of tax treaties, which now numbers 24, continues to boost the attractiveness of the region as an offshore business center especially for Chinese businesses.
Japan
As a close neighbor, activity by Chinese companies in Japan has been recently increasing. According to a report by the Japanese-government affiliated Research Institute of Economy, Trade and Industry, a survey showed the number of Japanese companies in which Chinese companies have taken a stake is 2.5 times the level of five years ago, amounting to more than 600 companies as of June 2010.
According to the terms of the treaty, Hong Kong profits tax, salaries tax and property tax, and Japan income tax, corporation tax and local inhabitant taxes are covered under the agreement. The treaty is expected to greatly increase the attractiveness of Hong Kong as a base for doing business in Japan, as the tax rate on dividends, interest and royalties under the Hong Kong treaty are more beneficial than both those signed with China and Singapore. This treaty will enable a Chinese investor using a Hong Kong company to invest in Japan to reduce its dividend withholding tax rate from 10 percent to 5 percent.
Luxembourg
Hong Kong treaty with Luxembourg, one of Europe foremost financial centers, covers profits tax, salaries tax and property tax in Hong Kong and individual income tax, corporation tax, capital tax and communal trade tax in Luxembourg. The newly effective protocol adds information sharing provisions to the original treaty.
The Netherlands
The Netherlands tax treaty covers Hong Kong profits tax, salaries tax and property tax and income tax, wages tax, company tax, taxes on the exploitation of natural resources and dividend tax in The Netherlands. Under the terms of the treaty, the withholding tax on passive income including dividends and royalties in the Netherlands will be lowered from 15 percent to zero percent for qualified persons holding at least 10 percent of the share capital of the paying companies.
France
One of Europe most popular destinations, France, signed a double taxation agreement with Hong Kong in late 2010. In a key measure given President Nicolas Sarkozy recent announcement of the intention to tax French expat income, the treaty specifically lays out provisions for dual citizens, as well as corporations.
Spain
The Spanish treaty, signed last year, will enter into force April 16. Under the agreement, Hong Kong residents receiving dividends from Spain will have their withholding tax halved, from 20 percent to 10 percent. The tax will be reduced to zero percent if the beneficial owner of the dividends is a company (other than a partnership) holding directly at least 25% of the capital of the company paying the dividends. Additionally, the Spanish withholding tax on interest for Hong Kong residents, currently standing at 19 percent, and the royalties tax, currently at 24 percent, will be capped at 5 percent.
Conclusion
As the jurisdiction of choice for many Chinese investors, Hong Kong newly effective tax treaties increase the choices for and tax efficiency of companies based in the special administrative region. Chinese investors with Hong Kong-based companies need to stay on top of fast changing international regulations in order to find the most tax effective solution for their businesses.
