On February 17, 2017 the Inland Revenue Department of the Government of the Hong Kong Special Administrative Region issued a press release announcing that on that same date the Government of the Hong Kong Special Administrative Region of the People’s Republic of China and the Government of the Islamic Republic of Pakistan signed an Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Hereafter: the DTA).
Although the DTA has been signed, it has not entered into force yet. For the DTA to enter into force, the respective ratification procedures have to have been finalized in both countries.
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 DTA 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 Pakistan,
(i) the income tax; and
(ii) the super 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, as well as any other taxes falling within paragraphs 1 and 2 of this Article which a Contracting Party may impose in future.
Residency
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.
Permanent establishment
Article 5, Paragraph 3 of the DTA (“Permanent Establishment”) arranges that the term “permanent establishment” also encompasses:
(a) a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than six months;
(b) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting Party for a period or periods aggregating more than 183 days within any twelve-month period.
In addition Article 5, Paragraph 4 of the DTA arranges that an enterprise shall be deemed to have a permanent establishment in a Contracting Party and to carry on business through that permanent establishment if it operates substantial equipment in that Party for a period exceeding twelve months.
With respect to profits to be attributed to a permanent establishment Article 7, Paragraphs 2 and 3 of the DTA (“Business Profits”) determine the following:
Article 7, Paragraph 2: “Subject to the provisions of paragraph 3, where an enterprise of a Contracting Party carries on business in the other Contracting Party through a permanent establishment situated therein, there shall in each Contracting Party be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.”
Article 7, Paragraph 3:
“(a) In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Party in which the permanent establishment is situated or elsewhere.
(b) However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices.”
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 Contracting Party.
With respect to immovable property Article 14, 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 14, 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.
With respect to this appropriate adjustment clause Article 9, Paragraph 3 determines that the provisions of paragraph 2 shall not apply where judicial, administrative or other legal proceedings have resulted in a final ruling that by actions giving rise to an adjustment of profits under paragraph 1, one of the enterprises concerned is liable to penalty with respect to fraud, gross negligence or wilful default.
Dividends
If the beneficial owner of the dividends is a resident of the other Contracting State, Article 10, Paragraph 2 of the DTA (“Dividends”) maximizes the withholding tax a Source State is allowed to withhold over dividends to 10 per cent of the gross amount of dividends.
Article 10, Paragraph 5 of the DTA reads as follows:
“Where a company which is a resident of a Contracting Party derives profits or income from the other Contracting Party, that other Party may not impose any tax on the dividends paid by the company, except in so far as such dividends are paid to a resident of that other Party or in so far as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other Party, nor subject the company’s undistributed profits to a tax on the company’s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other Party.”
Interest
If the beneficial owner of the interest is a resident of the other Contracting State, 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.
Article 12, Paragraph 4 subsequently arranges the provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting Party, carries on business in the other Contracting Party in which the royalties arise through a permanent establishment situated therein, or performs in that other Party independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with (a) such permanent establishment or fixed base, or with (b) business activities referred to in subparagraph (c) of Article 7, Paragraph 1 of the DTA. In such case the provisions of Article 7 or Article 15 of the DTA, as the case may be, shall apply.
Fees for technical services
Article 13, Paragraph 3 of the DTA (“Fees for Technical Services”) defines fees for technical services as meaning payments of any kind to any person, other than to an employee of the person making the payments, in consideration of any services of a technical, managerial or consultancy nature.
If the beneficial owner of the fees for technical services is a resident of the other Contracting State, Article 13, Paragraph 2 of the DTA maximizes the withholding tax a Source State is allowed to withhold over such fees to 12.5 per cent of the gross amount of the fees for technical services.
Anti-abuse clause
Article 28 of the DTA (“Miscellaneous Rules”) contains a.o. a so-called Principal Purpose Test.
Other
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 25) and regarding the Exchange of Information (Article 26).
Click here to be forwarded to the text of the DTA as available on the website of the Inland Revenue Department of Hong Kong.
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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