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India and Hong Kong’s particular administrative region of the people’s republic of China (Hong Kong) signed a tax treaty. The tax treaty will revive the flow of investment, technology, and personnel from India to Hong Kong and vice-versa, prevent double taxation and provide the exchange of information (EOI) between the two states. In addition, it will improve transparency in tax matters and help curb tax evasion and tax avoidance.
Taxes covered under this treaty are
Residence of the contracting party
Tie-breaker test in case of dual residency
In case an individual is a resident of both states, then his residential status shall be determined based on the following factors:
In the case of a person (except for an individual), his residential status shall be determined by MAP, regarding its place of effective management (POEM), the site of incorporation and any other relevant factors.
Royalties and fees for technical services
Royalty/fees for technical services (FTS) shall be taxed in the state of residence. Although, such royalty/FTS may also be taxed in the source state, but if the beneficial owner is a resident of another state, then tax so charged shall not exceed 10 per cent of the gross amount of royalty income.
The term ‘royalty’ has been described to mean payments of any kind collected as a consideration for the use of, or the authority to use, any copyright of literary, artistic or technical work, involving cinematograph films, or films or tapes utilized for television or radio broadcasting, any patent, trademark, design or model, scheme, secret formula or procedure, or for the use of, or the right to use, manufacturing, commercial or scientific equipment or for knowledge concerning the manufactuing, commercial or technological happenings.
The term ‘fees for technical services’ has been explained to mean consideration for managerial or technical or consultancy services, involving the provision of services of technical or other personnel but does not involve remittance for independent personal services and for dependent personal services. Where such gains are successfully linked to a PE/ fixed base in the source country, taxation will be controlled by the provisions of Article 7/ Article 15 on a net basis.
The benefits of royalty and FTS provisions should not be obtainable if the primary objective or one of the primary objectives of any individual concerned with the foundation or allotment of the rights in respect of which the royalties are remunerated or performance of services in respect of which the technical fees are paid to take advantage of these articles.
Dividend and interest
Dividend/interest may be taxed in the resident state. Although, such dividend/interest may also be taxed in the source state, but if the beneficial owner is a resident of another state, dividend tax shall not exceed 5 per cent of the gross amount. Furthermore, it shall not exceed 10 per cent of gross interest in case of interest income.
Additionally, interest is spared from tax if it is obtained and beneficially possessed by the government, a political subdivision or a local authority of the other state, Reserve Bank of India, Export-Import Bank of India or any other institution be agreed by the contracting states.
Where such incomes are effectively linked to a PE/ fixed base in the source country, taxation will be controlled by Article 7 or Article 15. The advantages of dividend and interest provisions shall not be available if the primary purpose or one of the primary objective of any individual concerned with the creation or allotment of the shares/other rights or debt-claim in respect of which the dividends/interests are remunerated is to take benefit of these articles through that creation or assignment.
Business profits and its attribution
Article 7 of the tax treaty also yields source taxation of business profits to the extent attributable to PE in the source country. While determining a PE’s profits, expenditures incurred for PE, including executive and general administrative expenses, shall be allowed as deduction.
The provision allows for applying an apportionment method or any other prescribed method as may be specified in the source country. To the extent, it follows the principle of Article 7. No gains shall be attributed to a PE because of the mere purchase by that PE of goods or merchandise for the enterprise.
Method to eliminate double taxation
To terminate the double taxation on a person, both states permit foreign tax credit (FTC) for the taxes remunerated in either of the states. The relief is given by the credit method subject to the maximum deduction limit.
The tax treaty has given beneficial withholding rates in dividend, interest, royalty and FTS. Although, such beneficial provisions are subject to anti-avoidance provisions. In line with the latest trend of introducing the limitation of benefit (LOB) clause under the Indian tax treaties, such a clause has been initiated in this tax treaty. The LOB clause under the tax treaty also yields out the applicability of domestic anti-avoidance provisions.
The tax treaty provides FTC, which will assist taxpayers reduce their tax burden. Further, the EOI article will benefit both the states to comply with international standards concerning transparency and facilitating tax evasion. The tax treaty involves few of the provisions of the multilateral instrument (MLI). India and Hong Kong are both signatories to MLI. There is liberal utility of principle purpose test (PPT) regarding the overall treaty and passive income streams in particular.
At AJSH, we assist our clients in dealing with various income tax compliances, including income tax assessments, ITR filings, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about the Tax Treaty between India and Hong Kong, kindly contact us.
