On January 18, 2016 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 Russian Federation 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 Agreement shall apply are:
(a) in the case of the Hong Kong Special Administrative Region,
(i) profits tax;
(ii) salaries tax;
(iii) property tax; whether or not charged under personal assessment;
(b) in the case of Russia,
(i) the tax on profits of organizations;
(ii) the tax on income of individuals.
Paragraph 4 of Article 2, 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 Article 2 of the DTA which a Contracting Party may impose in future.
Permanent establishment
Paragraph 3 of Article 5 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 12 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 in any twelve-month period commencing or ending in the taxable period concerned.
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 by 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 by that other Party.
Article 13, Paragraph 4 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 by that other Party. However, the provisions of Paragraph 4 do not apply to gains derived from the alienation of shares:
(a) quoted on such stock exchange as may be agreed between the Parties; or
(b) alienated or exchanged in the framework of a reorganisation of a company, a merger, a scission or a similar operation; or
(c) in a company deriving more than 50 per cent of its asset value from immovable property in which it carries on its business.
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 dividend distributions as follows:
(a) 5 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) 10 per cent of the gross amount of the dividends in all other cases.
Article 10, Paragraph 7 of the DTA contains an anti-abuse clause, which reads as follows: “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
Article 11, Paragraph 2 of the DTA (“Interest”) arranges that a Source State is to exempt interest from withholding tax.
Article 11, Paragraph 6 of the DTA contains an anti-abuse clause, which reads as follows: “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
Article 12, Paragraph 2 of the DTA (“Royalties”) maximizes the withholding tax that a Source State is a allowed to withhold over royalties 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 State.
Article 12, Paragraph 7 of the DTA contains an anti-abuse clause, which reads as follows: “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.”
Other
Furthermore the DTA contains 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 Hong Kong Inland Revenue Department, which will open in a new window.
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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