Tax and Me what do new Tax Information Agreements mean to me, when I m tax domiciled in Hong Kong Kim Osborg Nielsen Hong Kong, 17 th October 2013
Tax in Hong Kong Hong Kong applies the territorial basis of taxation, tax residency is not relevant Income that arises in or from a Hong Kong office or employment are subject to Hong Kong taxes Tax residence is relevant under a double taxation treaty In order to be considered as a resident person in HK, you need to ordinarily reside in HK for more than 180 days during the relevant year of assessment or for more than 300 days in 2 consecutive years 2
The attractiveness of Hong Kong taxation: Income tax 17 percent top rate, however the maximum effective rate is 15 percent No wealth tax, estate, inheritance and gift taxes Investment income Dividends Exempt Interest Royalties Rental income Generally exempted Subject to profits tax Subject to profits tax Property tax: Levied as an income tax at 15% on Hong Kong sourced income 3
How international double taxation may arise The scope of taxation Hong Kong is on the territorial system, whereas others have adopted a worldwide taxation basis (the Nordic countries) Source rules for income The source rules determine whether income is source taxed in the state where the income arises, or in the state where the income is received A Double Taxation Agreement (DTA) is an agreement between two jurisdictions seeking to avoid double taxation. A DTA can only reduce overall taxation, it cannot impose additional taxes! 4
Double Tax Treaties in force in Hong Kong Austria Hungary Malta Thailand Belgium Indonesia Netherlands United Kingdom Brunei Ireland New Zealand Vietnam China Italy Portugal Czech Republic Japan Qatar France Lichtenstein Spain Guernsey Luxembourg Switzerland According to a press release, published on the web site of the official Nordic co operation, negotiations for a tax agreement between Denmark and Hong Kong are currently taking place. 5
New Legal Framework in Hong Kong for Entering into Tax Information Exchange Agreements TIEAs: Standalone tax information exchange agreements CDTAs: Comprehensive avoidance of double taxation agreements (OECD) What is new? The Legislative Council has passed the Inland Revenue Bill 2013, which allows Hong Kong to enter into TIEAs with other jurisdictions. Prior to the enactment of the bill, Hong Kong could only exchange tax information if there was an existing CDTA with that jurisdiction. This has been heavily critisised by the OECD 6
What does new TIEA s and DTA s mean to me? Potentially lower taxes on dividends on Swedish, Norwegian, Finnish and Danish shares and on royalty taxes for companies Example: Dividend withholding tax for Hong Kong investor (without DTA) Sweden 30 percent Norway 25 percent Finland 30 percent Dividend withholding tax for Singapore investor (with DTA in place) Sweden 15 percent Norway 15 percent Finland 10 percent 7
8 Dividend payments
Who can benefit from DTAs? Only residents can benefit of the DTA. A resident is defined as: 1. An individual: A person who ordinarily reside in HK for more than 180 days during the relevant year of assessment or for more than 300 days in 2 consecutive years 2. A company or body of persons in control, whose business is exercised in Hong Kong 9
OECD Article 26 on Mutual Assistance in Tax Matters Tax Avoidance versus Tax Evasion EU withholding taxes Automatic exchange of information involves the systematic and periodic transmission of bulk taxpayer information by the source country to the residence country concerning dividends, interest, royalties etc. Name and address is enough, but no fishing expeditions allowed Access to information on investment income and beneficial owners Switzerland wants to clean up 10
More transparency case study The tax authorities of State A conduct a tax investigation into the affairs of Mr. X. Based on this investigation the tax authorities have indications that Mr. X holds one or several undeclared bank accounts with Bank B in State B. However, State A has experienced that, in order to avoid detection, it is not unlikely that the bank accounts may be held in the name of relatives of the beneficial owner. State A therefore requests information on all accounts with Bank B of which Mr. X is the beneficial owner and all accounts held in the names of his spouse E and his children K and L. 11
More transparency case study II Company A, resident of State A, is owned by foreign unlisted Company B, resident of State B. The tax authorities of State A suspect that managers X, Y and Z of Company A directly or indirectly own Company B. If that were the case, the dividends received by Company B from Company A would be taxable in their hands as resident shareholders under country A s controlled foreign company rules. The suspicion is based on information provided to State A s tax authorities by a former employee of Company A. When confronted with the allegations, the three managers of Company A deny having any ownership interest in Company B. The State A tax authorities have exhausted all domestic means of obtaining ownership information on Company B. State A now requests from State B information on whether X, Y and Z are shareholders of Company B. Furthermore, considering that ownership in such cases is often held through, for example, shell companies and nominee shareholders it requests information from State B on whether X, Y and Z indirectly hold an ownership interest in Company B. If State B is unable to determine whether X, Y or Z holds such an indirect interest, information is requested on the shareholder(s) so that it can continue its investigations. 12
Voluntary Disclosure The Hong Kong tax authorities accept and encourage voluntary disclosures of undeclared taxable income. A full voluntary disclosure would reduce the amount of potential penalties significantly. In order to constitute a full voluntary disclosure, a taxpayer must make a complete disclosure of the undeclared taxable income. Otherwise, the tax authorities can treat the case as an incomplete disclosure, which would attract heavier penalties. The maximum penalty is 300% of the amount of tax involved, in addition to the tax itself. Penalties at this level are almost unheard of. 13
Also China joins international efforts to end tax evasion Mr. Angel Gurria, OECD Secretary General and Mr. WANG Jun, Chinese Tax Commissioner On 27 th. August 2013 China signed the Multilateral Convention on Administrative Assistance in Tax Matters at a ceremony held at the OECD 14
DTA advantages for companies - Danish example What does it require to avoid Danish taxation on Hong Kong salary income, when moving to Hong Kong? - The employee disposes of residential property in Denmark, or - The employee is renting out the residential property in Denmark, irrevocably for at least 3 years - Centre of life-interest is not in Denmark - Also, Danish taxation on foreign salary income can be avoided, if the person establishes permanent residency in HK according to a Double Tax Agreement 15
What if I sell my house in Denmark, do I then still need to pay Danish tax? Can I own a holiday house without being tax liable to Denmark? I am expatriated for a Danish company, versus a local company. Am I then tax liable to Denmark? I am on a local contract instead of an expatriate contract, do Ithen avoid Danish taxation or is it the property in Denmark which determines my tax? Is the tax only related to salary or also investment income? 16
Wealth Planning the right way Wealth Planning Structure of investments, succession and inheritance planning Tax Planning Trusts Trusts can be an effective vehicle for asset protection against the creditors of an individual. The use of trusts normally allows for greater flexibility Tax Planning Companies For 2013 the profits tax rate for companies is a flat 16.5%. Income is subject to tax if it has a Hong Kong source. There is no taxation, however, of capital gains. 17 9
Thank you for your attention! Kim Osborg Nielsen Private Banking kim.nielsen@nordea.sg Mobile: +65 9658 9054 18
Disclaimer: Nordea Bank S.A. is subject to the supervision of the CSSF (Commission de Surveillance du Secteur Financier). This material has been prepared by Nordea Bank S.A. and shall be construed only as general information addressed to selected investors exclusively for their private use. It shall not be construed as a personal recommendation as regards the financial instruments or investment strategies mentioned in the material, nor as a personal recommendation to enter into a discretionary portfolio management agreement with Nordea Bank S.A. The material does not constitute investment advice, nor does it take into account the investor s economic situation, his/her current assets or liabilities, his/her knowledge and experience in financial instruments and markets, or his/her investment purposes, investment horizon, risk profile and preferences. Therefore, Nordea Bank S.A. may not be held liable for any loss suffered by an investor resulting from the content or the communication of this material. The present material specifically relates to and focuses on the Discretionary Portfolio Management ( DPM ) service proposed by Nordea Bank S.A. In relation to DPM, the investor empowers Nordea Bank S.A. to manage, pursuant to a pre-defined investment strategy but at the risk of the investor, assets of any kind held now or in the future in an account, on a discretionary basis and without the need for the prior consent of the investor. All investments and asset allocations are based on Nordea Bank S.A.'s expectations of future developments in the financial markets. These expectations may not be fulfilled, hence no yield or capital preservation is guaranteed. Depending on the chosen investment strategy, investments within the DPM framework may result in considerable losses, which are, however, limited to the amount invested. The investor shall be fully aware of the potential risks connected with the DPM and, more specifically, with the chosen investment strategy. Depending on the selected investment strategy, Nordea Bank S.A. may invest in different categories of financial instruments, each with their own specifics and levels of risk. The investor should be aware that the choice of one particular investment strategy may involve a higher degree of risk than another investment strategy. In particular, multi-manager portfolios may include investments in hedge funds that can entail a very high degree of risk and which could lead to the loss of the capital invested in such funds. Investors should also be aware that the investment result of a managed product that contains investment funds is not only dependent on the ability of Nordea Bank S.A. but also on the ability of the investment manager of the investment fund. The investor should only consider entering into a DPM agreement and choose an applicable investment strategy in this context if this is suitable for him/her in consideration of his/her financial situation, his/her experience in and knowledge of investment matters, and his/her investment objectives and horizon. Before entering into a DPM agreement, the investor must be clearly aware of the risks inherent in DPM and the chosen investment strategy and must be familiar with and understand the functionality of the types of financial instruments in which his/her assets may be invested pursuant to the investment strategy. In the context of the DPM, Nordea Bank S.A. may receive inducements from investment fund companies. For more information on such inducements, please consult Nordea Bank S.A. s conflicts of interest policy. The investor further understands that information, facts and performance evaluations provided in the material may only be correct at the stated date of issue, and that the information, facts and performance evaluations may be outdated at the time receipt of this material and/or the investor s investment decision due to various elements, including but not limited to market fluctuations. Any information in the material is given in good faith and is subject to change without notice. In addition, the performance stated in the material constitutes merely historical, past performance. Past performance is not a reliable indicator of future results. The future performance and risk calculations are indicative only and should not be relied upon by the investor for future investments. Maximum effective loss may be higher than the prospective loss. Conversely, no guarantee is given that this performance will be achieved. Nordea Bank S.A. advises every investor or potential investor to consult all relevant information in order to construe his/her own independent opinion before taking any investment decision, including the decision to enter into a DPM with Nordea Bank S.A. and the choice of the applicable investment strategy. Nordea Bank S.A. may not be held responsible for any tax consequences arising from the investments. Investors are therefore advised to seek clarification in this regard from the tax authorities and his/her tax advisors, both in Luxembourg and in the investor s country of residence. Portfolios, or the assets held therein, may i.a. be affected by the EU Savings Directive. This document may not be copied, duplicated or otherwise reproduced in whole or in part. Nordea Bank S.A., Singapore Branch 3 Anson Road, #20-01, Springleaf Tower 079909 Singapore Tel +65 65 97 10 70 Fax +65 65 97 10 80 www.nordeaprivatebanking.com 19