Hong Kong Tax Treaties: An Overview
As from the year of assessment 2014/2015, i.e. as from April 1st 2014, Hong Kong will have 28 unlimited double taxation treaties effectively in place (with Austria, Belgium, Brunei, Canada, Czech Republic, France, Guernsey, Hungary, Indonesia, Ireland, Japan, Jersey, Kuwait, Liechtenstein, Luxembourg, Mainland China, Malaysia, Malta, Mexico, the Netherlands, New Zealand, Portugal, Qatar, Spain, Switzerland, Thailand, the United Kingdom and Vietnam). The treaty with Italy has yet to be finalised.
Furthermore, double taxation negotiations are currently taking place with the following fourteen countries: Bahrain, Bangladesh, Finland, India, Israel, Korea, Latvia, Macao, Mauritius, Pakistan, Russia, Saudi Arabia, South Africa and the United Arab Emirates.
In addition, Hong Kong also signed its first tax exchange of information agreement with the United States, but in 2020 the long standing shipping income tax agreement was terminated unilaterally by the US government.
When comparing the 28 Hong Kong concluded double taxation treaties/arrangements with each other, one can first examine the articles on dividends, interest and royalty, followed by the relevant general anti-abuse provisions and limitations of benefits.
Comparison of Double Taxation Agreements
A general comparison leads to the following important conclusions (excluding the Hong Kong tax system):
1. The countries that levy no dividend withholding tax in an international context are: Brunei, Guernsey, Ireland, Jersey, Lichtenstein, Malta, Mexico, Qatar and the United Kingdom (Kuwait only in case of payments between governments);
2. The countries that levy a 0% withholding tax on dividends (subject to different conditions) are: Austria, Kuwait, Luxembourg, New Zealand (stock listed), the Netherlands, Spain and Switzerland;
3. The countries that levy a 5% withholding tax on dividends (subject to different conditions) are: Belgium, Canada, Czech Republic, Hungary, Indonesia, Japan, Kuwait, Mainland China, Malaysia, New Zealand and Portugal;
4. The countries that levy no interest withholding tax in an international context are: Austria, Czech Republic, Guernsey, Jersey, Lichtenstein, Luxembourg, Malta, Switzerland, the Netherlands, Qatar and the United Kingdom;
5. The countries that do levy a withholding tax on interest reduce this liability to zero percent in case of a loan between governments. Subject to different conditions, the lowest rate of 5% interest withholding tax is offered by Hungary, Kuwait, Mexico (4.9%) and Spain;
6. The countries that levy no royalty withholding tax in an international context are: Lichtenstein, Luxembourg, Switzerland and the Netherlands;
7. The countries that levy a royalty withholding tax of not more than 3% (again subject to certain conditions) are: Ireland, Malta and the United Kingdom (Jersey and Guernsey 4% );
8. The countries that have a brief miscellaneous provision within their double taxation treaty relating to the application of general domestic anti-abuse legislation are: Belgium, Czech Republic, Guernsey, Jersey, Kuwait, Luxembourg, Mainland China, Mexico, Portugal, Thailand and Vietnam;
9. The countries that have a brief miscellaneous provision within its double taxation treaty relating to the application of general domestic anti-abuse legislation and in addition specific but brief Limitation of Benefits clauses within its articles on dividend, interest and royalties are: Canada, France, Indonesia and Italy;
10. New Zealand, Qatar and the United Kingdom thereinafter have only specific but brief Limitation of Benefits clauses within their double taxation treaty articles on dividend, interest and royalties;
11. The country that has a brief miscellaneous provision within its double taxation treaty relating to the application of general domestic anti-abuse legislation and in addition specific and extensive Limitation of Benefits clauses within its articles on dividend, interest and royalties is: Switzerland;
12. The country that has a specific but a brief Limitation of Benefits article within its double taxation treaty is Japan; and
13. The countries that have a specific protocol regarding Limitation of Benefits attached to their double taxation treaties are: Mexico, Portugal, Spain and the Netherlands.
Many countries do not want their double taxation treaties to be used for “treaty shopping” as that would i) affect their tax base and ii) potentially harm their international reputation.
Countries incorporate therefore methods in their double taxation treaties to reduce this risk of treaty shopping, but this can be done in many different ways. When a country chooses for example to incorporate their domestic anti-abuse provisions into their double taxation treaties (see point 8 and 9 above), then there is a chance that as a result of domestic anti-abuse case law development in the state of one tax treaty partner, this will result in a negative impact on the levy rights of the tax treaty partner in the other state. Therefore, specific Limitation of Benefits within or outside the double taxation treaty by means of a protocol, addressing specific limitations should be considered as a better and fairer solution.
The Japanese Limitation of Benefits article, for example, determines that certain benefits under the double taxation treaty with Hong Kong are disallowed if “the MAIN purpose of any person connected with the creation or assignment of any right or property in respect of which income arises was to take advantage of such benefits by means of that creation or assignment”.
The Limitation of Benefits article in the Protocol of the Portugal, Spain and the Netherlands double taxation treaties with Hong Kong is largely similar to the Japanese one, with the primary difference being that the Portuguese, Spanish and Dutch Protocol even limits certain benefits under the double taxation treaty if it is ONE of the MAIN purposes of any person to secure benefits under the double taxation treaty.
Hong Kong Tax Treaty with Mexico
The Mexican – Hong Kong double taxation treaty thereinafter contains a protocol in which it is stated that the dividend, interest and royalty provisions of that treaty do not apply if 50% or more of the dividend, interest and royalty income, being part of a TRANSACTION or SERIES of TRANSACTIONS (paid directly or indirectly, at any time or form, by one of the treaty partners to the other treaty partners) is subsequently distributed to a resident in a third country which resident would not have been entitled to these beneficial withholding tax rates on dividend, interest and royalty income if this third country resident would have received this income directly from the treaty partner which initially distributed that income. In addition, the MAIN purpose of such structuring should be obtaining benefits under the treaty.
The Limitation of Benefits Protocol of the Mexican – Hong Kong double taxation treaty therefore contains characteristics which also can be found in the Japanese, Portuguese, Spanish and Dutch double taxation treaties with Hong Kong, but which are at the same time unique and cannot be found in any of the other treaties that Hong Kong has concluded (although some might argue that the Indonesian domestic tax anti-abuse provisions, which could impact the double taxation treaty between Hong Kong – Indonesia, contains similar ‘unique’ provisions).
Hong Kong Tax Treaty with the Netherlands
The Netherlands – Hong Kong double taxation treaty is however currently the only one that contains the most extensive Limitation of Benefits article. The advantage of such a provision is clarity. The more extensive the provision, the more certainty regarding the exact circumstances for which a treaty partner would provide for certain benefits under the double taxation arrangement. This is provided that it does not rely on domestic generic anti-abuse provisions. Of course, excessive Limitation of Benefits articles should also be avoided.
The Hong Kong – The Netherlands double taxation treaty indicates that the Netherlands will only reduce its domestic dividend withholding tax from 15% to 0% on Dutch dividends distributed by a Dutch subsidiary to its parent company in Hong Kong if this Hong Kong parent company is (i) a beneficial owner of the dividends and (ii) does not have as its main purpose or one of its main purposes to secure the 0% dividend withholding tax on Dutch dividends under the double taxation treaty.
The Protocol to the Hong Kong – The Netherlands double taxation treaty states subsequently that in order to determine the ‘function’ of the Hong Kong parent company, all facts and circumstances have to be considered, including a) the nature and volume of the activities of the Hong Kong parent company in relation to the nature and volume of the dividends, b) the historical and current ownership of the Hong Kong parent company and c) the business reasons for the Hong Kong company residing in Hong Kong.