Hong Kong signed a tax treaty with India

Transcription

1 News Flash Hong Kong Tax Hong Kong signed a tax treaty with India March 2018 Issue 4 In brief Hong Kong and India signed a comprehensive double tax agreement (CDTA) 1 on 19 March The HK/India CDTA represents the 39 th CDTA signed by Hong Kong. Key highlights of the HK/India CDTA for a Hong Kong tax resident company include: Having someone in India who (1) habitually maintains stock from which it delivers goods on behalf of a Hong Kong enterprise or (2) habitually secures orders in India wholly or almost wholly for a Hong Kong enterprise (or its associated enterprise) may constitute a dependent agent permanent establishment (PE) of that Hong Kong enterprise in India, even if the person does not conclude any contract in the name of the Hong Kong enterprise in India; the withholding tax rate (WHT) on interest income derived from India is reduced from 20% (in general) to 10%, subject to satisfying the beneficial ownership test; fees for provision of technical services in India are still subject to the 10% WHT even in the absence of a PE in India (i.e. the WHT is not eliminated under the CDTA); and there is no tax exemption in India for gains derived from disposal of shares in an Indian company. The HK/India CDTA does not offer any tax exemption for gains derived from disposal of shares in an Indian company. Going forward, the tax exemption for such gains under the India/Mauritius and India/Singapore tax treaties will gradually phase out although there is a grandfathering provision for shares acquired before 1 April 2017 in the two treaties 2. Eventually, Hong Kong will be on an equal footing with Mauritius and Singapore in terms of taxation of gains from share disposal in India. On the other hand, the WHT rate for interest income derived by non-financial institutions under the HK/India treaty is lower than that under the Singapore/India treaty. Depending on the particulars of their existing Indian investments, Hong Kong companies currently investing into India through a Mauritius or Singapore intermediate holding company may consider streamlining the holding structure and replacing it with a direct investment into India. In detail Salient features of the HK/India CDTA Effective dates If the CDTA is ratified and enters into force within 2018, it will become effective: from year of assessment 2019/20 in Hong Kong; and from fiscal year beginning on 1 April 2019 in India. Definition of Hong Kong resident A company incorporated in Hong Kong or a company incorporated outside Hong Kong but normally managed or controlled in Hong Kong is a Hong Kong resident under the HK/India CDTA. The Protocol to the CDTA further elaborates that an entity is normally managed or controlled in Hong Kong if its executive officers and senior management employees make day-to-day key decisions in Hong Kong for the strategic, financial and operational policy for the entity, and its staff conduct in Hong Kong the day-to-day activities necessary for making those decisions. PwC s comment: The above wording on normally managed or controlled follows the definition of the term primary place of management and control as mentioned in the

2 Commentary on Article 29 (Entitlement to Treaty Benefits) in the latest 2017 OECD Model Tax Convention. Permanent establishment The PE article contains provisions on fixed place PE, construction site PE (with a six-month threshold), service PE (with a 183-day threshold) and agency PE. In particular, a fixed place PE is defined to include, among others, a sales outlet and a warehouse in relation to a person providing storage facilities for others. For agency PE, in addition to a person having and habitually exercising an authority to conclude contracts in the name of an enterprise in India, a person who (1) habitually secures orders in India wholly or almost wholly for an enterprise or its associated enterprise or (2) maintains a stock of goods in India from which it regularly delivers goods on behalf of an enterprise will also be regarded as an agency PE of that enterprise. In addition, a person will not be regarded as an independent agent of an enterprise when its activities are devoted wholly or almost wholly on behalf of that enterprise, regardless of whether the person and the enterprise are dealing with each other on an arm s length basis 3. PwC s comment: PE provisions similar to those mentioned above also exist in some other tax treaties of India (e.g. the ones with Japan, Korea and Singapore). Pursuant to the provisions on dependent agents, a person who habitually secures orders in India for a Hong Kong company without concluding any contracts may still constitute an agency PE of the Hong Kong company in India. However, the PE article has not incorporated the changes recommended by the OECD under Action 7 of the Base Erosion and Profit Shifting project (i.e. preventing artificial avoidance of PE), such as the new provisions addressing the commissionaire arrangements and the anti-fragmentation rules for specific activity exemption. WHT rates on passive income Please refer to the table in the Appendix for a comparison of the nontreaty and treaty WHT rates on dividends, interest, royalties and technical services fees derived by a Hong Kong resident company from India. These WHT rates are subject to satisfying the beneficial ownership test. India currently does not impose any WHT on dividends paid to nonresidents. There is not any reduction in the WHT rates for royalties and technical services fees under the HK/India CDTA as compared to the Indian domestic rates. The CDTA only provides a reduced WHT rate for interest. The WHT rate for interest income derived by non-financial institutions under the HK/India treaty (i.e. 10%) is lower than that under the Singapore/India treaty (i.e. 15%). PwC s comment: Most of India s tax treaties (including the one with China and Singapore) do not offer a reduced WHT rate on royalties and technical services fees. On the other hand, there are a few Indian tax treaties (e.g. the one with Indonesia, Philippines and Thailand) which do not have any specific provision on technical services fees. For these treaties, the WHT on technical services fees can be eliminated provided that there is not a PE in India. Capital gains Under the domestic tax law of India, gains derived by a non-resident from disposal of shares in an Indian company are taxable in India. The applicable tax rate depends on factors such as whether the gains are shortterm or long-term in nature, whether the shares disposed of are listed or unlisted shares, and whether Securities Transaction Tax has been paid at the time of acquiring the shares. The HK/India CDTA does not provide any tax exemption for gains derived by a Hong Kong resident from disposal of shares in either an Indian company or a company of which the assets are mainly comprised of Indian immovable property. Moreover, there is a catch-all provision in the Capital Gains article such that gains derived from alienation of any property not specifically referred to in the article may also be taxed in India. The article also includes the principal purposes test under which treaty benefit may be denied if the main purpose or one of the main purposes of any person concerned is to take advantage of the treaty benefit. PwC s comment: The previous tax treaties that India signed with Mauritius and Singapore offered a tax exemption in India for gains derived from disposal of shares in an Indian company. However, both tax treaties were amended in Under the amended tax treaties, gains derived from disposal of shares acquired before 1 April 2017 will continue to be tax exempt in India whereas gains derived from disposal of shares acquired on or after 1 April 2017 may be taxed in India, but the applicable tax rate for such gains arising during the period beginning on 1 April 2017 and ending on 31 March 2019 will be reduced by a half. After 31 March 2019, the applicable tax rates for such gains will be on par with the domestic rates (that is the same as Hong Kong). It is therefore not surprising that no tax exemption is offered for gains from disposal of shares under the Capital Gains article of the HK/India CDTA. Income from international shipping transport Unlike most of the Hong Kong tax treaties under which the profits from international shipping transport are only taxed in the state of residence (i.e. exempt from tax in the state of source), under the HK/India CDTA, profits derived by a Hong Kong resident in India from the operation of ships in international traffic may be taxed in India, although there will be a 50% reduction on the tax imposed. Mutual agreement procedures The HK/India CDTA adopts the pre- July 2008 OECD model Mutual Agreement Procedure (MAP) article, that is, the article does not provide for arbitration if a case cannot be resolved by the competent authorities through MAP. Exchange of information The protocol to the HK/India CDTA specifies the following in relation to the Exchange of Information (EoI) article: information that precedes the effective date of the CDTA shall be disclosed upon request if the information is foreseeably relevant for a fiscal year or taxable event after the effective date of the CDTA; and the EoI article also applies to the following non-income taxes in India: the wealth tax, the excise and customs duties, the goods and services tax, the sales and value added taxes. 2 PwC

3 Limitation on benefits The article on Miscellaneous Rules in the HK/India CDTA contains the following provisions: the provisions of the CDTA do not prevent the contracting parties from applying their domestic laws and measures concerning tax avoidance or evasion; treaty benefits can be denied if the main purpose or one of the main purposes of any person concerned is for the non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements; and the above provisions also cover cases of legal entities not having bona fide business activities (i.e. legal entities without real business substance). The takeaway The HK/India CDTA does not offer any tax exemption for gains derived from disposal of shares in an Indian company. Going forward, the tax exemption for such gains under the India/Mauritius and India/Singapore tax treaties will gradually phase out although there is a grandfathering provision for shares acquired before 1 April 2017 in these two treaties 2. Eventually, Hong Kong will be on an equal footing with Mauritius and Singapore in terms of taxation of gains from share disposal in India. On the other hand, the WHT rate for interest income derived by nonfinancial institutions under the HK/India treaty is lower than that under the Singapore /India treaty. Depending on the particulars of their existing Indian investments, Hong Kong companies currently investing into India through a Mauritius or Singapore intermediate holding company may consider streamlining the holding structure and replacing it with a direct investment into India. Endnotes 1. The HK/India CDTA can be accessed via this link: hk/eng/pdf/agreement_india_hong Kong.pdf 2. Under the amended India/Mauritius and India/Singapore tax treaties, gains derived from disposal of shares in an Indian company acquired before 1 April 2017 will continue to be tax exempt in India. For gains derived from disposal of shares in an Indian company acquired on or after 1 April 2017, they will be taxable in India with a 50% reduced tax rate if arising between 1 April 2017 and 31 March 2019 and fully taxable in India if arising after 31 March This is a modified version of the independent agent clause in the United Nations Model Tax Convention. 3 PwC

4 Appendix: Withholding tax rates on dividends, interest, royalties and technical services fees under the HK-India CDTA The following table provides a comparison of the non-treaty and treaty withholding tax rates on dividends, interest, royalties and technical services fees derived by a Hong Kong resident company from India. Dividends Interest Royalties Technical services fees India non-treaty rate 1 Nil 5%/20% 2 10% 10% HK/India treaty rate 3 5% 0%/10% 4 10% 5 10% Notes 1. The indicated tax rates are exclusive of any applicable surcharge, education cess, and secondary and higher education cess. 2. The 20% rate applies in general whereas the 5% rate applies to certain specified types of interest (e.g. interest on money borrowed in foreign currency under a loan agreement and interest on certain long-term infrastructure bonds). 3. The beneficial ownership requirement is present in each of the Dividends, Interest, Royalties and Fees for Technical Services articles. In addition, the principal purposes test applies to all these articles such that treaty benefits available under these articles may be denied if the main purpose or one of the main purposes of any person concerned is to take advantage of these Articles The 0% rate applies to interest paid to the HKSAR Government, certain Hong Kong government authorities and the Exchange Fund. The 10% applies to all other cases. 5. The definition of royalties includes consideration received from lease of industrial, commercial or scientific equipment. 4 PwC

5 Let s talk For a deeper discussion of how this issue might affect your business, please contact a member of PwC s International Tax Advisory Team: David Smith david.g.smith@hk.pwc.com Jeremy Ngai jeremy.cm.ngai@hk.pwc.com Nigel Hobler nigel.hobler@hk.pwc.com With close to 2,700 tax professionals and over 170 tax partners in Hong Kong, Macao, Singapore, Taiwan and 22 cities in Mainland China, PwC s Tax and Business Service Team provides a full range of tax advisory and compliance services in the region. Our International Tax Advisory Team provides professional advice on a wide range of cross-border investment activities including inbound and outbound structuring, cross border financing, managing investment funds and global mergers and acquisitions. With a strong global network, our local international tax specialists can provide dynamic and robust tax solutions to multi-jurisdictions business operations of our clients. Senior tax buyers name PwC as their first choice tax provider in Hong Kong.* * These results are based on an independent survey of 100 primary buyers of tax services in Hong Kong, conducted by research agency Jigsaw Research (Q1-Q4 2016). In the context of this News Flash, China, Mainland China or the PRC refers to the People s Republic of China but excludes Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region. The information contained in this publication is for general guidance on matters of interest only and is not meant to be comprehensive. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PwC s client service team or your other tax advisers. The materials contained in this publication were assembled on 23 March 2018 and were based on the law enforceable and information available at that time. This Hong Kong Tax News Flash is issued by the PwC s National Tax Policy Services in Hong Kong and China, which comprises of a team of experienced professionals dedicated to monitoring, studying and analysing the existing and evolving policies in taxation and other business regulations in China, Hong Kong, Singapore and Taiwan. They support the PwC s partners and staff in their provision of quality professional services to businesses and maintain thought-leadership by sharing knowledge with the relevant tax and other regulatory authorities, academies, business communities, professionals and other interested parties. For more information, please contact: Matthew Mui +86 (10) matthew.mui@cn.pwc.com Please visit PwC s websites at (China Home) or (Hong Kong Home) for practical insights and professional solutions to current and emerging business issues PricewaterhouseCoopers Ltd. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details.