Hong Kong Tax Alert. Hong Kong signs comprehensive double tax agreement with the Russian Federation. Who is covered by the CDTA

Transcription

1 Hong Kong Tax Alert 29 January Issue No. 2 Hong Kong signs comprehensive double tax agreement with the Russian Federation On 18 January 2016, Hong Kong signed a comprehensive avoidance of double taxation agreement (CDTA) with the Russian Federation. This brings the number of CDTAs Hong Kong has concluded with other jurisdictions to thirty-four. The CDTA with the Russian Federation contains several favorable provisions which are expected to facilitate closer economic and trade ties between Hong Kong and the Russian Federation. This alert summarizes the salient points of the provisions of the CDTA as applicable to Hong Kong residents. Appendix I to this alert summarizes the status of Hong Kong s current CDTA network and CDTAs currently under negotiation or pending ratification. Who is covered by the CDTA The CDTA only applies to persons who are residents of either Hong Kong or the Russian Federation. In this regard, a company that is incorporated or constituted under the laws of Hong Kong automatically qualifies as a Hong Kong resident. A company which is not so incorporated or constituted, would be regarded as a Hong Kong resident only if it is normally managed or controlled in Hong Kong, a residence test commonly used in other CDTAs Hong Kong has concluded.

2 Tax benefits available to Hong Kong residents under the CDTA Business profits Active business profits of a Hong Kong resident enterprise will not be liable to tax in the Russian Federation unless they are attributable to a permanent establishment (PE) maintained by the Hong Kong enterprise in the Russian Federation. Where a Hong Kong enterprise has maintained a PE in the Russian Federation, only profits attributable to the PE will be liable to tax in the Russian Federation. A building site or construction, assembly or installation project or supervisory activities in connection therewith, of a Hong Kong resident enterprise will constitute a PE in the Russian Federation if such site, project or activities last more than 12 months. The furnishing of services, including consultancy services, by a Hong Kong resident enterprise through employees or other personnel engaged for such purpose that continue (for the same or a connected project) for a period or periods aggregating more than 183 days within any 12-month period will also constitute a PE in the Russian Federation. A Hong Kong resident enterprise will not be liable to tax in the Russian Federation if it simply maintains a buying office in the Russian Federation which only makes purchases for the Hong Kong resident enterprise. Hong Kong resident airliners and ship owners will not be subject to tax in the Russian Federation in respect of profits derived from international traffic. However, income of a Hong Kong resident airliner so exempt from taxation in the Russian Federation under the CDTA will be charged to tax in Hong Kong under the relevant provisions of the Hong Kong tax code. Where a Hong Kong resident enterprise transacts business with an associated Russian Federation resident enterprise in such a way that the profits that accrue to the Russian Federation resident enterprise are less than would accrue on an arm s length basis, the Russian Federation tax authorities can make a primary adjustment to increase the profits of the Russian Federation resident enterprise to an arm s length result. In such a case, and where the primary adjustment made to the profits of the Russian Federation resident enterprise is considered justified both in principle and in amount, the Hong Kong tax authorities would under Article 9 (Associated Enterprises) of the CDTA, make an appropriate corresponding adjustment to the profits of the Hong Kong resident enterprise so as to avoid double taxation. The above treatment would also apply in a reciprocal manner to the Russian Federation residents deriving active business profits in Hong Kong. Exemption or reduction of tax on dividends, interest, royalties and capital gains on disposal of shares Subject to specific anti-avoidance provisions, the below table summarizes the applicable withholding rates for the captioned income flows received from the Russian Federation by a Hong Kong resident as beneficial owner. Tax rate Normal withholding rate Reduced rate under the CDTA Notes Passive income Dividends Interest Royalties Capital gains on disposal of shares 15% 15/20% 2 20% 0/15.5/20% 3 0/5/10% 1 0% 3% 0% 4 1. A 0% rate applies if the dividend is paid to the Hong Kong Government, the Hong Kong Monetary Authority, the Exchange Fund or any entity wholly or mainly owned by the Hong Kong Government and mutually agreed upon by the competent authorities of the contracting parties. A 5% rate applies if the beneficial owner of the dividends is a company (other than a partnership) which holds directly at least 15% of the capital of the company paying the dividends. For other cases, the 10% rate applies. 2. Under the domestic tax law of the Russian Federation, the withholding tax rate on interest on certain types of State and Municipal Securities is 15%. 3. The 0% rate applies to capital gains realized by foreign companies that do not have a permanent establishment in the Russian Federation with respect to the disposal of shares in a Russian Federation company, provided that the holding period exceeds 5 years and the shares were acquired after 1 January The normal rates of 15.5% to 20% apply in other cases, depending on the region in which the company concerned is located. 4. The CDTA provides that capital gains derived by a Hong Kong resident investor on the disposal of shares in a Russian Federation company will generally be exempt from tax in the Russian Federation, unless the shares being disposed of are in respect of a company holding substantial immovable property in the Russian Federation and the shares are not quoted on a recognized stock exchange. 2

3 Avoidance of double taxation Where the income of a Hong Kong resident is subject to tax in both Hong Kong and the Russian Federation, the Hong Kong resident can credit the tax paid in the Russian Federation on the relevant income against the Hong Kong tax liability charged on the same income. The available tax credit is, however, limited to the Hong Kong tax charged on the same income. Exchange of Information (EoI) In addition to the direct taxes covered by the CDTA, Article 3 of the Protocol to the CDTA provides that the EoI provision shall also apply to the following taxes administered and effective in the Russian Federation: I. value added tax; II. tax on assets of organizations; and III. tax on property of physical persons. Effective date of the CDTA The CDTA will only come into force in the tax year following the calendar year in which the relevant ratification procedures are completed. Assuming that the ratification procedures can be completed in 2016, the CDTA shall then have effect as follows: a. in Hong Kong: for any year of assessment beginning on or after 1 April 2017; b. in the Russian Federation: for any tax period beginning on or after 1 January Commentary Shortly after concluding a CDTA with Romania on the Belt and Road route in November last year, Hong Kong has now concluded a CDTA with the Russian Federation, a major economy along the route. The CDTA offers many benefits that are not available under other CDTAs of the Russian Federation. For example, the 0% withholding tax on interest and 3% withholding tax on royalties under the CDTA are amongst the lowest rates offered by the Russian Federation to its CDTA partners including China. As such, in addition to promoting trade and investment between Hong Kong and the Russian Federation, the CDTA will also enable Hong Kong to play an active role as a super-connector in the Belt and Road Initiative of mainland China. As a super-connector, Hong Kong could serve as a platform through which mainland enterprises can go global and attract foreign investment. Clients who wish to explore how they can benefit from this CDTA, or the ever expanding CDTA network of Hong Kong as shown in Appendix I, can contact their tax executives. 3

4 Appendix I Latest status of the Hong Kong s CDTA network 31 CDTAs signed and ratified Country / jurisdiction Effective in Hong Kong from the year of assessment Effective in the other contracting party from the year of assessment 1. Austria 2012/13 1 January Belgium 2004/05 1 January Brunei 2011/12 1 January Canada 2014/15 1 January Czech Republic 2013/14 1 January France 2012/13 1 January Guernsey 2014/15 1 January Hungary 2012/13 1 January Indonesia 2013/14 1 January Ireland 2012/13 1 January Italy 2016/17 1 January Japan 2012/13 1 January Jersey 2014/15 1 January Kuwait 2014/15 1 January Liechtenstein 2012/13 1 January Luxembourg 2008/09 1 January Mainland China 2007/08 1 January Malaysia 2013/14 1 January Malta 2013/14 1 January Mexico 2014/15 1 January Netherlands 2012/13 1 January New Zealand 2012/13 1 April Portugal 2013/14 1 January Qatar 2014/15 1 January South Africa 2016/17 1 January Spain 2013/14 1 April Switzerland 2013/14 1 January Thailand 2006/07 1 January United Kingdom 2011/12 1 or 6 April United Arab Emirates 2016/17 1 January Vietnam 2010/11 1 January CDTAs - signed but pending ratification Korea, Romania and Russian Federation 12 CDTAs under negotiation Bahrain, Bangladesh, Finland, Germany, India, Israel, Latvia, Macau SAR, Macedonia, Mauritius, Pakistan and Saudi Arabia 4

5 Hong Kong office Agnes Chan, Managing Partner, Hong Kong & Macau 22/F, CITIC Tower, 1 Tim Mei Avenue, Central, Hong Kong Tel: / Fax: Head of Tax, Ernst & Young Tax Services Limited Tracy Ho tracy.ho@hk.ey.com Hong Kong Tax partners Agnes Chan agnes.chan@hk.ey.com Joe Chan joe-ch.chan@hk.ey.com Owen Chan owen.chan@hk.ey.com Wilson Cheng wilson.cheng@hk.ey.com Chee Weng Lee chee-weng.lee@hk.ey.com May Leung may.leung@hk.ey.com Grace Tang grace.tang@hk.ey.com Karina Wong karina.wong@hk.ey.com Jo An Yee jo-an.yee@hk.ey.com International tax services partners Alice Chan-Loeb alice.chan@hk.ey.com Joe Kledis joe.kledis@hk.ey.com Cherry Lam cherry-lw.lam@hk.ey.com Bas Leenders bas.leenders@hk.ey.com Edvard Rinck edvard.rinck@hk.ey.com Transfer pricing partners Curt Kinsky curt.kinsky@hk.ey.com Martin Richter martin.richter@hk.ey.com Kenny Wei kenny.wei@hk.ey.com EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young Tax Services Limited. All Rights Reserved. APAC No ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/china