On November 18, 2015 Hong Kong and Romania concluded 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
According to 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 Romania:
(i) the tax on income; and
(ii) the tax on profit.
Paragraph 4 of Article 2 of the DTA subsequently arranges that the Agreement 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.
Permanent establishment
Paragraph 3 of Article 5 of the DTA (“Permanent Establishment”) arranges that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.
Paragraph 5 of Article 5 of the DTA subsequently arranges that notwithstanding the provisions of paragraphs 1 and 2 aof article 5 of the DTA, where a person - other than an agent of an independent status to whom paragraph 6 applies - is acting in a Contracting Party on behalf of an enterprise of the other Contracting Party, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting Party in respect of any activities which that person undertakes for the enterprise, if such a person:
(a) has, and habitually exercises, in the first-mentioned Contracting Party an authority to conclude contracts in the name of the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph, or
(b) has no such authority, but habitually maintains in the first-mentioned Party a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise.
Business Profits
Article 7 of the DTA (“Business Profits”) contains and interesting Paragraph 4, which reads as follows: “Insofar as it has been customary in a Contracting Party to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting Party from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article”
Associated enterprises
Paragraph 2 of Article 9 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, Paragraph 2 of Article 10 of the DTA (“Dividends”) maximizes the dividend withholding tax that a Source State is allowed to withhold over dividend distributions to:
(a) 3 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 15 per cent of the capital of the company paying the dividends;
(b) 5 per cent of the gross amount of the dividends in all other cases.
Anti-abuse clause
Paragraph 7 of Article 10 of DTA contains the following anti-abuse clause: “The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid to take advantage of this Article by means of that creation or assignment.”
Interest
Paragraph 2 of Article 11 of the DTA (“Interest”) maximizes the withholding tax that a Source State is allowed to withhold over interest payments to 3 per cent of the gross amount of the interest if the beneficial owner of the interest is a resident of the other Contracting Party.
Article 11 of the DTA contains a very interesting paragraph 3, which reads as follows: “Notwithstanding the provisions of paragraph 2, if and as long as the Hong Kong Special Administrative Region, under its internal legislation, levies no withholding tax on interest, the percentage provided for in paragraph 2 shall be reduced to zero. The competent authority of the Hong Kong Special Administrative Region shall inform the competent authority of Romania of any changes made in the internal legislation of the Hong Kong Special Administrative Region regarding the imposition of a withholding tax on interest.”
Anti-abuse clause
Paragraph 9 of Article 11 of DTA contains the following anti-abuse clause: “The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.”
Royalties
Paragraph 2 of Article 12 of the DTA (“Royalties”) maximizes the withholding tax that a Source State is allowed to withhold over royalty payments to 3 per cent of the gross amount of the royalties if the beneficial owner of the royalties is a resident of the other Contracting Party.
Anti-abuse clause
Paragraph 97 of Article 12 of DTA contains the following anti-abuse clause: “The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties are paid to take advantage of this Article by means of that creation or assignment.”
Capital Gains
With respect to capital gains Paragraph 1 of Article 13 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.
Paragraph 4 of Article 13 of the DTA subsequently arranges that gains derived by a resident of a Contracting Party from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting Party may be taxed in that other Party.
General anti-abuse clause
The DTA contains an article 26 titled: “Anti-abuse measures”, which reads as follows: “Nothing in this Agreement shall prejudice the right of each Contracting Party to apply its internal laws concerning tax avoidance, whether or not described as such.”
Other
The DTA furthermore includes articles containing provision regarding a Mutual Agreement Procedure (Article 23 of the DTA) and an article on the Exchange of Information (Article 24 of the DTA).
Click here to be forwarded to the (English) text of the DTA as available on the website of the Inland Revenue Department of the Hong Kong Special Administrative Region.
Are you looking for an other DTA? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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