Hong Kong Tax Alert 21 April 2016 2016 Issue No. 7 Hong Kong signs comprehensive double tax agreement with Latvia On 13 April 2016, Hong Kong signed a comprehensive avoidance of double taxation agreement (CDTA) with Latvia. This brings the number of CDTAs Hong Kong has concluded with other jurisdictions to thirtyfive. The CDTA with Latvia contains several favorable provisions which are expected to facilitate closer economic and trade ties between Hong Kong and Latvia. 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 Latvia. 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. Taxpayers may require a Hong Kong certificate of residence To enjoy the preferential tax treatments in Latvia detailed below, the tax authority of Latvia may require that a Hong Kong tax resident produce a certificate of residence (CoR) issued by the Inland Revenue Department (IRD) confirming that the taxpayer is a Hong Kong tax resident. In processing an application for a CoR, the IRD may, in addition to the residence test, consider whether the applicant is the beneficial owner of the income concerned. Where the applicant has little or no business substance in Hong Kong, the IRD may also consider whether the taxpayer may be abusing the terms of a CDTA. As such, regardless of whether a company is incorporated or constituted under the laws of Hong Kong, it should not be assumed that said company will automatically be granted a CoR. 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 Latvia unless they are attributable to a permanent establishment (PE) maintained by the Hong Kong enterprise in Latvia. Where a Hong Kong enterprise has maintained a PE in Latvia, only profits attributable to the PE will be liable to tax in Latvia. A building site or construction, assembly or installation project or supervisory activities in connection therewith, of a Hong Kong resident enterprise will only constitute a PE in Latvia if such site, project or activities last more than nine months (this is shorter than the twelve months period provided under the OECD Model). The furnishing of services, including consultancy services, by a Hong Kong resident enterprise through employees or other personnel engaged for such purpose will only constitute a PE in Latvia if the services continue (for the same or a connected project) for a period or periods exceeding in the aggregate six months within any twelve month period. The Protocol to the CDTA further provides that a Hong Kong resident enterprise engaged in offshore activities in connection with the exploration or extraction from the sea bed and sub-soil of natural resources situated in Latvia will only be deemed to have a PE in Latvia if it carries on such activities in Latvia for a period or periods exceeding in the aggregate thirty days in any twelve month period. A Hong Kong resident enterprise will not be liable to tax in Latvia if it simply maintains a buying office in Latvia which only makes purchases for the Hong Kong resident enterprise. Hong Kong resident airliners and ship owners will not be subject to tax in Latvia in respect of profits derived from international traffic. However, income of a Hong Kong resident airliner so exempt from taxation in Latvia under the CDTA will be charged to tax in Hong Kong under the relevant provisions of the Hong Kong tax code. The above treatments will apply in a reciprocal manner to Latvian 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 Latvia by a Hong Kong resident as beneficial owner. Tax rate Passive income Normal withholding rate Reduced rate under the CDTA Notes Dividends Interest Royalties Capital gains on disposal of shares 0/15/30% 1 0/5/15% 1 0/15% 1 0/2% 5 0/10% 2 0/10% 3 0/3% 4 0/2% 6 1. No withholding tax is imposed on dividends, interest and royalties paid by Latvian entities, except for such income paid to a resident of a state or territory that has been recognized as a low-tax or notax state or territory under the domestic tax law of Latvia. Various rates apply to such payments. 2. A 0% rate applies if the beneficial owner of the dividend is a company (other than a partnership), the Hong Kong government, the Hong Kong Monetary Authority, the Exchange Fund, any institution wholly or mainly owned by the Hong Kong government as may be agreed from time to time between the competent authorities of the contracting parties, or a pension fund or scheme. For all other cases, a 10% rate applies. 3. A 0% rate applies if the beneficial owner of the interest is a company (other than a partnership), the Hong Kong government, the Hong Kong Monetary Authority, the Exchange Fund, any institution wholly or mainly owned by the Hong Kong government as may be agreed from time to time between the competent authorities of the contracting parties, or a pension fund or scheme. For all other cases, a 10% rate applies. 4. A 0% rate applies if the beneficial owner of the royalties is a company (other than a partnership). For all other cases, a 3% rate applies. 5. Under the current domestic tax law in Latvia, gains on the disposal of shares in a Latvian company whose assets do not comprise substantially real estate in Latvia are not subject to tax in Latvia. A 2% withholding tax rate is however imposed on proceeds received from the sale of shares of a company, if in the year of the sale or in the preceding year, 50% or more of the company s assets directly or indirectly consist of real estate located in Latvia. 6. Under the CDTA, capital gains on the disposal of shares in a Latvian company derived by a Hong Kong resident investor will generally be exempt from tax in Latvia. The major exception to this is when the shares being disposed of are in respect of a company holding substantial immovable property located in Latvia. This exception will not apply however if certain conditions are met. Avoidance of double taxation Where the income of a Hong Kong resident is subject to tax in both Hong Kong and Latvia, the Hong Kong resident can credit the tax paid in Latvia on the relevant income against the Hong Kong tax liability arising 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 4 of the Protocol to the CDTA provides that the EoI provision shall also apply to value added tax and immovable property tax administered and effective in Latvia. 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 Latvia: for any tax period beginning on or after 1 January 2017. 3
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 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. United Arab Emirates 2016/17 1 January 2016 31. Vietnam 2010/11 1 January 2010 4 CDTAs - signed but pending ratification Korea, Latvia, Romania and Russian Federation 12 CDTAs under negotiation Bahrain, Bangladesh, Cyprus, Finland, Germany, India, Israel, Macau SAR, Macedonia, Mauritius, Pakistan and Saudi Arabia 4
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