On May 24, 2018 the Government of the Hong Kong Special Administrative Region of the People’s Republic of China and the Government of the Republic of Finland signed an Agreement for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (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.
Pre-amble
The Pre-amble to the DTA reads as follows:
“The Government of the Hong Kong Special Administrative Region of the People’s Republic of China and the Government of the Republic of Finland,
Intending to eliminate double taxation with respect to the taxes covered by this Agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this Agreement for the indirect benefit of residents of third jurisdictions),
Have agreed as follows:”
Taxes covered
Based on Article 2, Paragraph 3 of the DTA (“Taxes Covered”), the existing taxes to which the Agreement shall apply are:
(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 Finland:
(i) the state income taxes (valtion tuloverot; de statliga inkomstskatterna);
(ii) the corporate income tax (yhteisöjen tulovero; inkomstskatten för samfund);
(iii) the communal tax (kunnallisvero; kommunalskatten);
(iv) the church tax (kirkollisvero; kyrkoskatten);
(v) the tax withheld at source from interest (korkotulon lähdevero; källskatten på ränteinkomst); and
(vi) the tax withheld at source from non-residents’ income (rajoitetusti verovelvollisen lähdevero; källskatten för begränsat skattskyldig).
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 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, the competent authorities of the Contracting Parties shall endeavour to determine by mutual agreement the Contracting Party of which such person shall be deemed to be a resident for the purposes of the Agreement, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such an agreement, such person shall not be entitled to claim any benefits under the Agreement, except that such person may claim the benefits of Articles 22 and 23, and the competent authorities may determine by mutual agreement the mode of application of the rest of the Agreement to that person.
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 nine months;
(b) the furnishing of services, including consultancy services, by an enterprise directly or 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 270 days within any twelve-month period.
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 paragraph 2 of Article 6 and situated in the other Contracting Party 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 (other than shares traded on a recognized stock exchange) or other corporate rights in a company of whose assets (the value thereof) more than 50 per cent, directly or indirectly, consists of 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 State, Article 10, Paragraph 2 of the DTA (“Dividends”) maximizes the withholding tax a Source State is allowed to withhold over dividends to:
(a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which controls directly at least 10 per cent of the voting power in the company paying the dividends;
(b) 10 per cent of the gross amount of the dividends in all other cases.
Interest
Article 11 of the DTA (“Interest”) arranges that a Source State is not allowed to withhold withholding taxes over interest payments.
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 the royalties to 3 per cent of the gross amount of the royalties.
Entitlement to benefits
Article 21 of the DTA (“Entitlement to Benefits”) contains a.o. a so-called Principal Purpose Test.
Other
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 24) and regarding the Exchange of Information (Article 25).
Click here to be forwarded to the text of the DTA as available on the website of the Inland Revenue Department of the Government of the Hong Kong Special Administrative Region of the People’s Republic of China.
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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