Hong Kong Tax Alert 27 November 2015 2015 Issue No. 19 Hong Kong signs comprehensive double tax agreement with Romania On 18 November 2015, Hong Kong signed a comprehensive avoidance of double taxation agreement (CDTA) with Romania. This brings the number of CDTAs Hong Kong has concluded with other jurisdictions to thirty-three. The CDTA with Romania contains several favorable provisions which are expected to facilitate closer economic and trade ties between Hong Kong and Romania. 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 Romania. 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.
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 Romania unless they are attributable to a permanent establishment (PE) maintained by the Hong Kong enterprise in Romania. Where a Hong Kong enterprise has maintained a PE in Romania, only profits attributable to the PE will be liable to tax in Romania. 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 Romania if such site, project or activities last more than 12 months. For other general types of services such as consultancy services, this will be the fifth CDTA Hong Kong has concluded (after those with Japan, Spain, Canada and South Korea) that has not included a service PE definition. As a result, and following on from the above two items, even though consultancy services may be performed in Romania for a substantial period of time (e.g., for more than 183 days), the Hong Kong resident enterprise will not be liable to tax in Romania so long as the enterprise s presence in Romania does not constitute a fixed place PE or an agency PE in Romania. In addition, the Hong Kong resident enterprise will also not be subject to withholding tax levied on commissions and services rendered in Romania (as long as they are not attributable to a Romanian PE of the Hong Kong resident) pursuant to the CDTA (i.e., the domestic tax law being overridden by the CDTA). A Hong Kong resident enterprise will not be liable to tax in Romania if it simply maintains a buying office in Romania which only makes purchases for the Hong Kong resident enterprise. Hong Kong resident airliners and ship owners will not be subject to tax in Romania in respect of profits derived from international traffic. However, income of a Hong Kong resident airliner so exempt from taxation in Romania 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 Romania resident enterprise in such a way that the profits that accrue to the Romania resident enterprise are less than would accrue on an arm s length basis, the Romania tax authorities can make a primary adjustment to increase the profits of the Romania resident enterprise to an arm s length result. In such a case, and where the primary adjustment made to the profits of the Romania 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 Romanian residents deriving active business profits in Hong Kong. 2
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 Romania by a Hong Kong resident as beneficial owner. Passive income Capital gains on disposal of shares Dividends Interest Royalties Tax rate Normal withholding rate 16% 1, 7 16% 1, 3 16% 1 16% 5 Reduced rate under the CDTA 0/3/5% 2 0% 4 3% 0% 6 Notes 1. As Romania is an European Union (EU) member state, payments of dividends, interest and royalties made by a Romanian company to another company resident in an EU member state are exempt from withholding tax if certain conditions are satisfied pursuant to the relevant EU directives. 2. A 0% rate applies if the dividend is paid to the HKSAR government, the Hong Kong Monetary Authority, the Exchange Fund or a financial institution wholly or mainly owned by the HKSAR government and mutually agreed upon by the competent authorities of the contracting parties; a 3% 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 5% rate applies. 3. Under the domestic tax law of Romania, no withholding tax would be levied on interest paid in relation to public debt instruments issued by the State (Government and municipal bonds included) denominated in local and foreign currency or instruments issued by the National Bank of Romania with the purposes of reaching monetary policy objectives, and on interest paid to EU pension funds (as defined according to the legislation of the EU Member States or the European Free Trade Association (EFTA) States). 4. A 0% rate applies as long as Hong Kong levies no withholding tax on interest. If Hong Kong levies withholding tax on interest in future, the rate will be capped at 3%. 5. Under the domestic tax law of Romania, income derived from the sale or assignment of shares in Romanian legal entities, or in legal entities from countries with which Romania has entered into a CDTA, would not be taxable in Romania if the taxpayer holds at least 10% of the share capital of the entity whose shares are being disposed of for an uninterrupted period of one year. 6. Capital gains derived by a Hong Kong resident investor on the disposal of shares in a Romanian entity will generally be exempt from tax in Romania under the CDTA, unless the shares being disposed of are in respect of a company which derives more than 50% of its asset value directly or indirectly from immovable property situated in Romania. 7. Under the domestic tax law of Romania, no withholding tax would be levied on dividends paid to EU pension funds (as defined according to the legislation of the EU Member States or the EFTA States). Avoidance of double taxation by way of a tax credit mechanism Where the income of a Hong Kong resident is subject to tax in both Hong Kong and Romania, the Hong Kong resident may credit the tax paid in Romania 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. 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 Romania: for any income derived beginning on or after 1 January 2017. Commentary Romania is one of the countries under the One Belt One Road initiative launched by mainland China that aims to connect Asia, Europe and Africa and to foster co-operation between countries along the route in political, economic and social matters. In this regard, the CDTA would enhance Hong Kong s role as a super connector by serving as a springboard for foreign investments into Romania, particularly those from mainland China. The CDTA offers many benefits that are not available under other CDTAs. For example, the CDTA is one of the few Romanian CDTAs that offer a 0% withholding tax on interest to non-governmental organizations (as long as Hong Kong does not levy withholding tax on interest under its domestic law). The 3% withholding tax on dividends and royalties under the CDTA is also amongst the lowest rates offered by Romanian CDTAs (for example, the withholding tax on dividends and royalties under the CDTA between Romania and China is 10% and 7% respectively). 3
Appendix I Latest status of the Hong Kong s CDTA network 30 CDTAs signed and ratified Country / jurisdiction Effective from the year of assessment (Hong Kong) Effective from the year of assessment (the other contracting party) 1. Austria 2012/13 1 January 2012 2. Belgium 2004/05 1 January 2004 3. Brunei 2011/12 1 January 2011 4. Canada 2014/15 1 January 2014 5. Czech Republic 2013/14 1 January 2013 6. France 2012/13 1 January 2012 7. Guernsey 2014/15 1 January 2014 8. Hungary 2012/13 1 January 2012 9. Indonesia 2013/14 1 January 2013 10. Ireland 2012/13 1 January 2012 11. Italy 2016/17 1 January 2016 12. Japan 2012/13 1 January 2012 13. Jersey 2014/15 1 January 2014 14. Kuwait 2014/15 1 January 2014 15. Liechtenstein 2012/13 1 January 2012 16. Luxembourg 2008/09 1 January 2008 17. Mainland China 2007/08 1 January 2007 18. Malaysia 2013/14 1 January 2013 19. Malta 2013/14 1 January 2013 20. Mexico 2014/15 1 January 2014 21. Netherlands 2012/13 1 January 2012 22. New Zealand 2012/13 1 April 2012 23. Portugal 2013/14 1 January 2013 24. Qatar 2014/15 1 January 2014 25. South Africa 2016/17 1 January 2016 26. Spain 2013/14 1 April 2013 27. Switzerland 2013/14 1 January 2013 28. Thailand 2006/07 1 January 2006 29. United Kingdom 2011/12 1 or 6 April 2011 30. Vietnam 2010/11 1 January 2010 3 CDTAs - signed but pending ratification Korea, Romania and UAE 13 CDTAs under negotiation Bahrain, Bangladesh, Finland, Germany, India, Israel, Latvia, Macau SAR, Macedonia, Mauritius, Pakistan, Russian Federation and Saudi Arabia 4
Financial Services Hong Kong office Ian McNeill Managing, Tax, Asia-Pacific +852 2849 9568 ian.mcneill@hk.ey.com Principal tax contact Florence Chan +852 2849 9228 florence.chan@hk.ey.com Business Tax Services Paul Ho +852 2849 9564 paul.ho@hk.ey.com Michael Stenske +852 2846 9865 michael.stenske@hk.ey.com Napson Hon +852 2849 9163 napson.hon@hk.ey.com Sunny Liu +852 2846 9883 sunny.liu@hk.ey.com International Tax Services James Badenach +852 2629 3988 james.badenach@hk.ey.com John Praides +852 2629 3269 john.praides@hk.ey.com Adam Williams +852 2849 9589 adam-b.williams@hk.ey.com Aaron Lam +852 2849 9504 aaron-nk.lam@hk.ey.com Brandan Wing +852 2849 9249 brandan.wing@hk.ey.com Michelle Yan +852 2629 3843 michelle.yan@hk.ey.com Peggy Lok +852 2629 3866 peggy.lok@hk.ey.com Transfer Pricing Services Justin Kyte +852 2629 3880 justin.kyte@hk.ey.com Jonathan Thompson +852 2629 3879 jonathan.thompson@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. 2015 Ernst & Young Tax Services Limited. All Rights Reserved. APAC No. 03002700 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