Hong Kong Tax alert - Ernst & Young T Magazine
Hong Kong Tax alert - Ernst & Young T Magazine
Hong Kong Tax alert - Ernst & Young T Magazine
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13 April 2011<br />
<strong>Hong</strong> <strong>Kong</strong><br />
<strong>Tax</strong> <strong>alert</strong><br />
<strong>Hong</strong> <strong>Kong</strong> signs comprehensive<br />
double tax agreement with Portugal<br />
On 22 March 2011, <strong>Hong</strong> <strong>Kong</strong> signed a comprehensive double taxation agreement<br />
(CDTA) with Portugal. This brought the number of CDTAs <strong>Hong</strong> <strong>Kong</strong> has<br />
concluded with other jurisdictions to nineteen.<br />
The CDTA with Portugal contains several favorable provisions, which are expected<br />
to further promote investment and trading between <strong>Hong</strong> <strong>Kong</strong> and Portugal. This<br />
<strong>alert</strong> summarizes the salient points of those provisions as applicable to <strong>Hong</strong> <strong>Kong</strong><br />
residents.<br />
Business profits<br />
► Active business profits of a <strong>Hong</strong> <strong>Kong</strong> resident enterprise will not be liable to tax<br />
in Portugal unless they are attributable to a permanent establishment (PE)<br />
maintained by the <strong>Hong</strong> <strong>Kong</strong> enterprise in Portugal. Where a <strong>Hong</strong> <strong>Kong</strong><br />
enterprise has maintained a PE in Portugal, only profits attributable to the PE<br />
would be liable to tax in Portugal.<br />
► The furnishing of services (for the same or a connected project) by a <strong>Hong</strong> <strong>Kong</strong><br />
resident enterprise directly or through employees or other personnel in Portugal<br />
for a period or periods aggregating not more than 183 days within any 12-month<br />
period will not render the enterprise as being considered to maintain a PE in<br />
Portugal.<br />
► A <strong>Hong</strong> <strong>Kong</strong> resident enterprise will not be liable to tax in Portugal if it simply<br />
maintains a buying office in Portugal which only makes purchases for the <strong>Hong</strong><br />
<strong>Kong</strong> resident enterprise.<br />
► <strong>Hong</strong> <strong>Kong</strong> resident airliners and ship owners will not be subject to tax in<br />
Portugal in respect of profits derived from international traffic.
2<br />
.<br />
Exemption or reduction of tax on dividends, interest, royalties and the treatment of<br />
capital gains on disposal of shares<br />
The following table summarizes the applicable withholding rates for the captioned<br />
income flows received from Portugal by a <strong>Hong</strong> <strong>Kong</strong> resident as beneficial owner.<br />
<strong>Tax</strong> rate<br />
Notes<br />
Passive<br />
income<br />
1 The higher withholding tax rate of 21.5% applies to individual recipients.<br />
2 A 5% rate applies if the beneficial owner of the dividends is a company (other than a partnership) holding<br />
directly at least 10% of the capital of the dividend paying company. For other cases, the 10% rate applies.<br />
3 A 0% rate applies if the beneficial owner of the interest is:<br />
(a) the <strong>Hong</strong> <strong>Kong</strong> government;<br />
(b) the <strong>Hong</strong> <strong>Kong</strong> Monetary Authority;<br />
(c) other similar institutions wholly owned or funded by the <strong>Hong</strong> <strong>Kong</strong> government which may be<br />
established in the future, as mutually agreed by the competent authorities of the two parties.<br />
For other cases, a 10% rate applies.<br />
4 Capital gains on disposal of shares derived by a <strong>Hong</strong> <strong>Kong</strong> resident investor other than those from the<br />
alienation of shares of a company which has 50% or more of its assets comprising, directly or indirectly, of<br />
immovable property located in Portugal would not be chargeable to tax in Portugal.<br />
<strong>Hong</strong> <strong>Kong</strong> <strong>Tax</strong> <strong>alert</strong><br />
Dividends Interest Royalties Capital gains<br />
on disposal of<br />
shares<br />
Normal withholding rate 21.5% 21.5% 15% / 21.5% 1 25%<br />
Reduced rate under the<br />
CDTA<br />
Ponte Vasco da Gamma, Lisbon, Portugal<br />
5%/10% 2 0% / 10% 3 5% 0% 4<br />
There is however a specific anti-treaty shopping provision contained in the Protocol to<br />
the CDTA governing the taxation of dividends, interest, royalties, capital gains and<br />
other income. This provision will deny the tax benefits otherwise available if the<br />
transactions involve conduit arrangements under which the relevant income streams<br />
are all or substantially paid by the recipient to a third person, and the main purpose of<br />
structuring the transactions in this manner is to take advantage of the relevant tax<br />
benefits under the CDTA.
Effective date of the CDTA<br />
The CDTA will only come into force in the tax year following the calendar year in<br />
which the relevant ratification procedures are completed. Assuming that the<br />
ratification procedures can be completed in 2011, the CDTA shall then have effect as<br />
follows:<br />
(a) for <strong>Hong</strong> <strong>Kong</strong>: for any year of assessment beginning on or after 1 April 2012;<br />
(b) for Portugal: for any income year beginning on or after 1 January 2012.<br />
Conclusion<br />
For <strong>Hong</strong> <strong>Kong</strong> resident corporate investors holding directly at least 10% of the<br />
capital of the dividend paying company in Portugal, the reduction under the CDTA of<br />
the dividend withholding tax from the normal rate of 21.5% to 5% is more preferential<br />
than that available under many of Portugal’s other CDTAs. For example, under the<br />
China-Portugal CDTA, the rate can only be reduced to 10%. Furthermore, while<br />
Portugal’s CDTAs with Turkey and the United States also provide for a reduced rate of<br />
5%, in order to qualify for the reduced rate investors from those countries must have<br />
held at least 25% of the shares of the dividend paying company continuously for a<br />
period of at least 2 years preceding the date of payment of the dividend.<br />
In addition, Portugal, being a member of the European Union (EU), observes and<br />
benefits from various EU Directives under which withholding taxes on the payment of<br />
dividends, interest and royalties etc. between group companies situated in different<br />
EU member states is eliminated. Therefore, the CDTA with Portugal has now added<br />
one more EU location to <strong>Hong</strong> <strong>Kong</strong>’s CDTA network (in addition to Belgium,<br />
Luxembourg and the Netherlands etc.) through which outbound investments into<br />
these and other EU member states can be structured.<br />
Clients who have significant investments outside their own jurisdiction, especially<br />
those in the EU, should consider whether it is desirable to leverage <strong>Hong</strong> <strong>Kong</strong>’s<br />
expanding CDTA network when considering the location of their regional holding or<br />
operational companies. In this regard clients should seek professional tax advice.<br />
<strong>Hong</strong> <strong>Kong</strong> office<br />
18/F, Two International, Finance Centre, 8 Finance Street, Central, <strong>Hong</strong> <strong>Kong</strong><br />
Tel: +852 2846 9888 / Fax: +852 2868 4432<br />
Principal tax contact<br />
Tracy Ho<br />
+852 2846 9065<br />
tracy.ho@hk.ey.com<br />
<strong>Hong</strong> <strong>Kong</strong> <strong>Tax</strong> partners<br />
Agnes Chan<br />
+852 2846 9921<br />
agnes.chan@hk.ey.com<br />
Florence Chan<br />
+852 2849 9228<br />
florence.chan@hk.ey.com<br />
Joe Chan<br />
+852 2629 3092<br />
joe-ch.chan@hk.ey.com<br />
Owen Chan<br />
+852 2629 3388<br />
owen.chan@hk.ey.com<br />
Chee Weng Lee<br />
+852 2629 3803<br />
chee-weng.lee@hk.ey.com<br />
May Leung<br />
+852 2629 3089<br />
may.leung@hk.ey.com<br />
Loretta Shuen<br />
+852 2629 3778<br />
loretta.shuen@hk.ey.com<br />
Grace Tang<br />
+852 2846 9889<br />
grace.tang@hk.ey.com<br />
Jo An Yee<br />
+852 2846 9710<br />
jo-an.yee@hk.ey.com<br />
International <strong>Tax</strong> Services partners<br />
Patrick Cheung<br />
+852 2846 9905<br />
patrick.cheung@hk.ey.com<br />
Chris Finnerty<br />
+852 2629 3868<br />
chris.finnerty@hk.ey.com<br />
Becky Lai<br />
+852 2629 3188<br />
becky.lai@hk.ey.com<br />
Christian Pellone<br />
+852 2629 3308<br />
christian.pellone@hk.ey.com<br />
<strong>Ernst</strong> & <strong>Young</strong><br />
Assurance | <strong>Tax</strong> | Transactions | Advisory<br />
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© 2011 <strong>Ernst</strong> & <strong>Young</strong> <strong>Tax</strong> Services Limited<br />
All Rights Reserved.<br />
FEA no. 03001051<br />
This publication contains information in summary form<br />
and is therefore intended for general guidance only. It is<br />
not intended to be a substitute for detailed research or the<br />
exercise of professional judgment. Neither the <strong>Ernst</strong> &<br />
<strong>Young</strong> <strong>Tax</strong> Services Limited nor any other member of the<br />
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