On September 30, 2016 the Inland Revenue Department of the Hong Kong Special Administrative Region issued a press release announcing that on September 27, 2016 the Agreement between the Government of the Hong Kong Special Administrative Region of the People’s Republic of China and the Government of the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, (Hereafter: the DTA) entered into force.
The fact that the DTA entered into force on September 27, 2016 means that based on Article 27, Paragraph 2 of the DTA (“Entry into Force”) the provisions of the DTA shall have effect:
(a) in the Hong Kong Special Administrative Region: in respect of Hong Kong Special Administrative Region tax, for any year of assessment beginning on or after April 1, 2017;
(b) in Korea:
(i) in respect of taxes withheld at source, for amounts payable on or after April 1, 2017; and
(ii) in respect of other taxes, for any taxable year beginning on or after January 1, 2017.
Below we will discuss a selection of provisions included in the DTA of which we think they might interest our readers.
Taxes covered
Based on Article 2, Paragraph 3 of the DTA (“Taxes Covered”), the existing taxes to which the Agreement shall apply are in particular:
(a) in the case of the Hong Kong Special Administrative Region,
(i) profits tax;
(ii) salaries tax; and
(iii) property tax;
whether or not charged under personal assessment;
(b) in the case of Korea,
(i) the income tax;
(ii) the corporation tax;
(iii) the special tax for rural development; and
(iv) the local income tax.
Article 2, Paragraph 4 subsequently arranges that the DTA shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Agreement in addition to, or in place of, the existing taxes referred to in paragraph 3, as well as any other taxes falling within paragraphs 1 and 2 which a Contracting Party may impose in the future.
Residency
With respect to the residency of a person other than an individual, Article 4, Paragraph 3 of the DTA (“Resident”) arranges that where by reason of the provisions of paragraph 1, a person other than an individual is a resident of both Contracting Parties, then it shall be deemed to be a resident only of the Party in which its place of effective management is situated. In case of doubt, the competent authorities of the Contracting Parties shall endeavour by mutual agreement to determine the Party in which that person’s place of effective management is situated, and in doing so, shall take into account all relevant factors. In the absence of such agreement, that person shall not be entitled to claim any benefits provided by this Agreement, except those provided by Articles 21, 22 and 23.
Permanent establishment
Article 5, Paragraph 3 of the DTA (“Permanent Establishment”) arranges that a building site or construction, assembly or installation project or supervisory activities in connection therewith constitute a permanent establishment only if such site, project or activities last more than twelve months.
Immovable property
Article 6, Paragraph 1 of the DTA (“Income from Immovable Property”) arranges that income derived by a resident of a Contracting Party from immovable property (including income from agriculture or forestry) situated in the other Contracting Party may be taxed in that other Party.
With respect to immovable property Article 13, Paragraph 1 of the DTA (“Capital Gains”) arranges that gains derived by a resident of a Contracting Party from the alienation of immovable property referred to in Article 6 and situated in the other Contracting Party may be taxed in that other Party.
Article 13, Paragraph 2 of the DTA subsequently arranges that gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting Party has in the other Contracting Party, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise), may be taxed in that other Party.
Article 13, Paragraph 4 of the DTA subsequently arranges that gains derived by a resident of a Contracting Party from the alienation of shares of a company deriving more than 50 per cent of its asset value directly or indirectly from immovable property situated in the other Contracting Party may be taxed in that other Party.
Associated enterprises
Article 9, Paragraph 2 of the DTA (“Associated Enterprises”) contains a so-called appropriate adjustment clause.
Dividends
If the beneficial owner of the dividends is a resident of the other Contracting Party, Article 10, Paragraph 2 of the DTA (“Dividends”) maximizes the withholding tax a Source State is allowed to withhold over dividends to:
(a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends;
(b) 15 per cent of the gross amount of the dividends in all other cases.
Interest
If the beneficial owner of the interest is a resident of the other Contracting Party, Article 11, Paragraph 2 of the DTA (“Interest”) maximizes the withholding tax a Source State is allowed to withhold over such interest to 10 per cent of the gross amount of the interest.
Royalties
If the beneficial owner of the royalties is a resident of the other Contracting State, Article 12, Paragraph 2 of the DTA (“Royalties”) maximizes the withholding tax a Source State is allowed to withhold over such royalties to 10 per cent of the gross amount of the royalties.
Limitation on Benefits
Article 26 of the DTA contains provisions regarding the Limitation on Benefits. The provisions of Article 26 of the DTA reads as follows:
1. In respect of Articles 10, 11, 12, 13, and 20, a resident of a Contracting Party shall not be entitled to benefits otherwise accorded to residents of a Contracting Party by this Agreement, if the main purpose or one of the main purposes of any person concerned with the creation or assignment of any share, debt-claim, property or right in respect of which the income is paid is to take advantage of these Articles by means of that creation or assignment.
2. Nothing in this Article shall be construed as restricting, in any manner, the application of any provisions of the law of a Contracting Party which are designed to prevent the avoidance or evasion of taxes
Other
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 23) and regarding the Exchange of Information (Article 24).
Click here to be forwarded to the text of the DTA as available on the webite of the Government of the Hong Kong Special Administrative Region.
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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