Double Taxation Treaties
Until June 2001, the territory had no comprehensive double taxation agreements in place. Since under the “territorial principle” only Hong Kong source income is taxable the double taxation of income does not usually occur thereby obviating the need for double taxation treaties. However the government is now entering an increasing number of tax treaties of various types. Under article 151 of the Basic Law the territory can negotiate its own double taxation treaties independently of China using the abbreviation Hong Kong, China. The territory is not able to take advantage of any double taxation treaties which China may enter into because only mainland taxes are mentioned in these treaties. Nor will China impose the terms of any double taxation treaties on the territory given that under articles 106-108 of the Basic Law it guaranteed Hong Kong the right to maintain an independent taxation system free of interference from the mainland until the year 2047.
Legislation which came into operation in March 2010 allows Hong Kong to enter into comprehensive DTAs, incorporating the Organisation for Economic Cooperation and Development (OECD) international standard on exchange of information.
In April 2010 Hong Kong has entered a “new phase” in supporting the international effort to enhance tax transparency, and its next hurdle would be to sign at least twelve comprehensive double taxation agreements (DTAs).
There had been some concern within Hong Kong that the territory may become ‘black listed’ by the OECD, or be on the receiving end of sanctions for failing to implement the internationally-agreed standard on tax transparency and information exchange confirmed at the April 2009 G20 Summit in London.
In September 2012 Hong Kong has taken “remarkable steps forward” in establishing its international tax treaty network since the amendment to the Inland Revenue Ordinance in March 2010, and since then, the tax treaty network of Hong Kong has expanded rapidly. As at March 31, 2012, Hong Kong had signed a total of 23 comprehensive double taxation agreements, of which 17 were in force by that date.
As at September 7, 2012, comprehensive double taxation avoidance treaties had been concluded between Hong Kong and the following countries (with ‘in force’ dates):
Austria (January 1, 2011)
Belgium (July 7, 2004)
Brunei (December 19, 2010)
Czech Republic (January 24, 2012)
France (January 1, 2011)
Hungary (February 23, 2011)
Indonesia (March 28, 2012)
Ireland (February 10, 2011)
Japan (August 14, 2011)
Liechtenstein (July 8, 2011)
Luxembourg (January 20, 2009)
Mainland China (April 10, 1998, Second Protocol June 11, 2008 and Third Protocol December 20, 2010)
Malta (July 18, 2012)
Netherlands (October 24, 2011)
New Zealand (November 9, 2011)
Portugal (June 3, 2012)
Spain (April 13, 2012)
Thailand (December 7, 2005)
UK (December 20, 2010)
Vietnam (August 12, 2009)
Double taxation agreements between Hong Kong and the following countries have been signed but are awaiting ratification (with signature dates):
Austria (Protocol, June 25, 2012)
Jersey (February 22, 2012)
Kuwait (May 13, 2010)
Malaysia (April 27, 2012)
Mexico (June 18, 2012)
Switzerland (October 4, 2011)
Hong Kong also has signed double taxation agreements concerning aviation and shipping income with a number of countries (although some of these agreements have been superseded by recently-signed comprehensive double tax avoidance agreements).
There is also a memorandum of understanding with China under which:
– Chinese source income earned by Hong Kong based shipping, aviation and land transport operations is exempt from tax on the mainland;
– Hong Kong enterprises are only taxable in China if they have a permanent establishment there.(A permanent establishment is defined as an activity which continually lasts for more than 6 out of 12 months).
– Hong Kong resident individuals are not subject to tax for services rendered in mainland China so long as they do not reside more than 183 days in the country in any tax year.
– Hong Kong will give a tax credit for any tax paid in mainland China.