Hong Kong Tax Alert 31 August 2017 2017 Issue No. 13 Hong Kong signs comprehensive double tax agreement with Saudi Arabia On 24 August 2017, Hong Kong signed a comprehensive avoidance of double taxation agreement (CDTA) with Saudi Arabia. This brings the number of CDTAs Hong Kong has concluded with other jurisdictions to 38. The CDTA with Saudi Arabia contains several favorable provisions which are expected to facilitate closer economic and trade ties between Hong Kong and Saudi Arabia. This alert summarizes the salient points of the provisions of the CDTA 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 by Hong Kong or pending ratification.
Who is covered by the CDTA The CDTA only applies to persons who are residents of either Hong Kong or Saudi Arabia. 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 adopted in other CDTAs Hong Kong has concluded. Taxpayers may require a Hong Kong certificate of residence To enjoy the preferential tax treatments in Saudi Arabia detailed below, the tax authority of Saudi Arabia 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 evaluate whether the taxpayer may be abusing the terms of a CDTA and if so, the IRD may decline to issue a CoR. 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 Saudi Arabia unless they are attributable to a permanent establishment (PE) maintained by the Hong Kong enterprise in Saudi Arabia. Where a Hong Kong enterprise has maintained a PE in Saudi Arabia, only profits attributable to the PE will be liable to tax in Saudi Arabia. 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 Saudi Arabia if such site, project or activities last more than six months (this is shorter than the twelvemonth period provided for under the Model Tax Treaty Convention of the Organization for Economic Cooperation and Development). 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 Saudi Arabia if the services continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period. A Hong Kong resident enterprise will not be liable to tax in Saudi Arabia if it simply maintains a buying office in Saudi Arabia which only makes purchases for the Hong Kong resident enterprise. A Hong Kong resident enterprise will however, likely be regarded as having a PE in Saudi Arabia if it maintains a stockpile of goods in Saudi Arabia for the purpose of delivery of goods to fill orders. Hong Kong resident airliners and ship owners will not be subject to tax in Saudi Arabia in respect of profits derived from international traffic. However, income of a Hong Kong resident airliner so exempt from taxation in Saudi Arabia 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 Saudi Arabian 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 Saudi Arabia by a Hong Kong resident as beneficial owner. Tax rate Passive income Normal withholding rate Reduced rate under the CDTA Dividends Interest Royalties Capital gains on disposal of shares 5% 5% 15% 20% 1 5% 0% 5/8% 2 0% 3 1. Under the domestic tax law of Saudi Arabia, capital gains arising on the sale by non-saudi shareholders of shares in a Saudi joint stock company traded on the Saudi Stock exchange are exempt from tax if the shares were acquired after 30 July 2004. 2. The 5% rate applies if the royalties are for the use of, or the right to use, industrial, commercial, or scientific equipment. The 8% rate applies in all other cases. 3. Capital gains on the disposal of shares in a Saudi Arabian company derived by a Hong Kong resident investor will generally be exempt from tax in Saudi Arabia. Major exceptions to this are (i) the shares being disposed of are in respect of a company holding substantial immovable property located in Saudi Arabia; or (ii) the Hong Kong resident investor owns 10% or more of the shares being alienated in Saudi Arabia. 2
Article for teachers and researchers For the first time in a CDTA negotiated by Hong Kong, the CDTA contains an article that specifically exempts remuneration received by resident teachers and researchers of one party for undertaking teaching or research at an educational institution in the other party from taxation in the other party, provided their presence in the other party, solely for the said purpose, does not exceed 2 years (instead of the normal 183 days-within-anytwelve-month-period rule). Avoidance of double taxation Where the income of a Hong Kong resident is subject to tax in both Hong Kong and Saudi Arabia, the Hong Kong resident can credit the tax paid in Saudi Arabia 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 the same manner as other CDTAs which Hong Kong has signed since 2010, the CDTA has restricted the EoI in respect of taxpayers between the two contracting parties to only the types of direct taxes covered by the CDTA and upon request only. Commentary The CDTA offers certain benefits that are not available under many other CDTAs concluded by Saudi Arabia. For example, the 0% withholding tax on interest and 5% or 8% withholding tax on royalties under the CDTA are amongst the lowest rates offered by Saudi Arabia to its CDTA partners. The above lower withholding rates on interest and royalties received by Hong Kong resident enterprises from Saudi Arabia will facilitate Hong Kong playing the role of super-connector, in terms of Hong Kong s provision of finance, technical know-how and equipment in respect of infrastructure projects undertaken in Saudi Arabia, a strategic economy along the Belt and Road Initiative of mainland China. Furthermore, people and cultural exchanges between Hong Kong and Saudi Arabia will also be facilitated by the inclusion of the Article covering teachers and researchers in the CDTA as explained above. Clients who wish to explore how they can benefit from this CDTA, or from the ever expanding CDTA network of Hong Kong as shown in Appendix I, can contact their tax executives. 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 2017, the CDTA shall then have effect as follows: a) in Hong Kong: for any year of assessment beginning on or after 1 April 2018; b) in Saudi Arabia: for any tax period beginning on or after 1 January 2018. 3
Appendix I Latest status of the Hong Kong s CDTA network 34 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. Korea 2017/18 1 January 2017 15. Kuwait 2014/15 1 January 2014 16. Liechtenstein 2012/13 1 January 2012 17. Luxembourg 2008/09 1 January 2008 18. Mainland China 2007/08 1 January 2007 19. Malaysia 2013/14 1 January 2013 20. Malta 2013/14 1 January 2013 21. Mexico 2014/15 1 January 2014 22. Netherlands 2012/13 1 January 2012 23. New Zealand 2012/13 1 April 2012 24. Portugal 2013/14 1 January 2013 25. Qatar 2014/15 1 January 2014 26. Romania 2017/18 1 January 2017 27. Russian Federation 2017/18 1 January 2017 28. South Africa 2016/17 1 January 2016 29. Spain 2013/14 1 April 2013 30. Switzerland 2013/14 1 January 2013 31. Thailand 2006/07 1 January 2006 32. United Kingdom 2011/12 1 or 6 April 2011 33. United Arab Emirates 2016/17 1 January 2016 34. Vietnam 2010/11 1 January 2010 4 CDTA - signed but pending ratification Belarus, Latvia, Pakistan and Saudi Arabia 13 CDTAs under negotiation Bahrain, Bangladesh, Cambodia, Cyprus, Finland, Germany, India, Israel, Macau SAR, Macedonia, Mauritius, Nigeria and Turkey 4
EY Contacts Hong Kong office Agnes Chan, Managing Partner, Hong Kong & Macau 22/F, CITIC Tower, 1 Tim Mei Avenue, Central, Hong Kong Tel: +852 2846 9888 / Fax: +852 2868 4432 EY Asia-Pacific Business Tax Services Leader Tracy Ho +852 2846 9065 tracy.ho@hk.ey.com EY Asia-Pacific International Tax Services Leader Alice Chan-Loeb +852 2629 3882 alice.chan@hk.ey.com EY Asia-Pacific Transfer Pricing Leader Curt Kinsky +852 2629 3098 curt.kinsky@hk.ey.com EY Greater China Business Tax Services Leader Chee Weng Lee +852 2629 3803 chee-weng.lee@hk.ey.com Hong Kong Business Tax Services partners, Agnes Chan +852 2846 9921 agnes.chan@hk.ey.com Owen Chan +852 2629 3388 owen.chan@hk.ey.com Wilson Cheng +852 2846 9066 wilson.cheng@hk.ey.com May Leung +852 2629 3089 may.leung@hk.ey.com Grace Tang +852 2846 9889 grace.tang@hk.ey.com Karina Wong +852 2849 9175 karina.wong@hk.ey.com Jo An Yee +852 2846 9710 jo-an.yee@hk.ey.com International Tax Services partners, Aaron Topol +852 2675-2980 Email: aaron.topol@hk.ey.com Joe Kledis +852 2846 9808 joe.kledis@hk.ey.com Cherry Lam +852 2849 9563 cherry-lw.lam@hk.ey.com Jeroen van Mourik +852 2846 9788 jeroen.van.mourik@hk.ey.com Transfer Pricing Services partners, Martin Richter +852 2629 3938 martin.richter@hk.ey.com Kenny Wei +852 2629 3941 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. APAC No. 03005295 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 Follow us on WeChat Scan the QR code and stay up to date with the latest EY news. 2017. All Rights Reserved.