Expansion of tax treaty network

Hong Kong has been moving in a faster pace of expanding its tax treaty network.  As soon as the tax legislation was amended in March 2010, Hong Kong has entered into eight comprehensive double tax arrangements (CDTA), namely with Brunei, Indonesia, Hungary, Kuwait, Austria, The Netherlands, United Kingdom and Ireland and updated the CDTA with Mainland China, with the 2004 Organization for Economic Co-operation and Development (OECD) Exchange of Information (Eoi) article, as of June 22, 2010.  Hong Kong is also negotiating with some other existing CDTA partners to upgrade the Eol Article to the 2004 version.

Domestically, the Departmental Interpretation and Practice Notes (“DIPN”) No.47 – Exchange of Information under Comprehensive Double Taxation Agreements was issued by the IRD on June 10, 2010 to provide guidelines on the implementation of exchange of information.

From the individual tax perspective, an individual would be able to utilize the treaty benefits under CDTA to enjoy full exemption of employment income (the “183-day exemption”) if he /she qualifies as a tax resident and satisfies other requisite conditions provide under the CDTA.  To qualify for the 183-day exemption of employment income, the following three conditions must be satisfied:

1.          The individual is present in other Party for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the taxation period concerned;

2.          The remuneration is paid by, or on behalf of, an employer who is not a resident of the other Party; and

3.          The remuneration is not borne by a permanent establishment (“PE”) which the employer has in the other Party.

Except the above criteria, due care should be exercised to review (i) the assignees’ tax residency, (ii) the day counting methodology, (iii) the cost recharge and (split) payroll arrangement and (iv) the PE exposures.  These factors would have an impact on the individuals’ eligibility for the 183-day exemption and should be reviewed carefully.

Foreign investors are advised to be aware of the potential tax planning opportunities which could emerge with such expansion. For example, the Hong Kong – Ireland double taxation agreement would increase Hong Kong’s attractiveness as a preferred jurisdiction to set up a holding company when structuring investments into Ireland.  The same would apply to foreign investments into China as well as Chinese outbound investments into other countries for which Hong Kong serves as ideal gateway.  Equally important, it is important for employers and employees to examine the sustainability of the tax filing positions adopted while they are embarking.

Disclaimer:

The publication contains information in summary form and is therefore intended for general guidance only.  This publication is not intended as legal, accounting or other professional advice and should not be relied upon as such.  If legal, accounting or other professional advice or expert assistance is required, the services of a competent professional should be sought.  Neither Reanda Lau & Au Yeung nor any related entity shall have any liability to any person or entity that relies on the information contained in this publication.