Hong Kong-Canada Double Taxation Agreement: Ratification and Implications

Article Taken fromA�Orangefield ICS Newsletter

On November 11thA�2012, the governments of Hong Kong and Canada signed a comprehensive double taxation agreement.[1]A�Under this tax treaty, tax paid in Hong Kong can now be offset against tax payable in Canada and vice versa. Once ratified by both governments, withholding tax rates will be reduced from current levels according to the following schedule:

  • Where the beneficial owner directly or indirectly owns at least 10% of the voting rights in a subsidiary, the withholding rates on dividends paid to the parent will be reduced from the Canada non-treaty 25% rate to 5%.
  • Where less than 10% of the voting rights in a subsidiary are held, the withholding rate will be reduced from the Canada non-treaty 25% rate to 15%.
  • Withholding tax on interest is reduced from the Canada non-treaty 25% rate to 10%, except in circumstances where the rate may be reduced to 0%.[2]

Assuming the ratification process is completed by both governments in 2013, it will be effective at the earliest by January 2014. For Canada, the Cabinet must prepare an Order in Council authorizing the Minister of Foreign Affairs to sign an Instrument of Ratification. Although the executive branch of government, usually through the Ministry of Foreign Affairs, retains the ultimate authority to implement an international treaty, as of January 2008 the House of Commons has the opportunity to debate and submit recommendations before ratification. For Hong Kong, under the Inland Revenue Ordinance an Order has to be made with the office of the Chief Executive. The Order is then subject to discussion and potentially negative vetting by the Legislative Council before it may be implemented.

Should both countries exchange completed instruments of ratification before the end of 2012, the signed income tax agreement will come into effect as of the 1stA�of January 2013. Otherwise it will only be effective on the following year, the 1stA�of January 2014. With regard to Hong Kong, the agreement will be effective as of the year of assessment in 2012/2013; otherwise, it will take effect for the year of assessment in the subsequent calendar year.

With the recently increasing volume of business occurring between Canadian and Asian companies understanding where to, and more importantly why to, choose a regional base of operations has become a top priority. A tax efficient strategy can be critically important for the success of any business operating in multiple jurisdictions, which explains the enthusiastic reception of the November 2012 tax agreement from both sides of the pacific. A key benefit of this argument is that dividends from the actively earned income of a Hong Kong subsidiary of a Canadian company can now be tax free when repatriated.

Hong Konga��s technologically efficient infrastructure, reliable common law courts, and highly evolved banking system provide a unique gateway through which Canadian companies considering the diverse Asian marketplace may effectively conduct their business while actively realizing the agreementa��s many benefits. Asian investors looking to enter Canada are not left behind either. While Hong Konga��s foundation in Chinese cultural traditions already creates a favourable climate for Chinese entrepreneurs, the treaty also extends additional tax saving benefits to those individuals willing to establish themselves offshore. Anti-avoidance rules under the treaty do present an issue of careful consideration; any subsidiary created solely to take advantage of the treaty will not be permitted to benefit from the reduced withholding rates. Proper planning and effective management of the affairs of the Hong Kong subsidiary can mitigate much of the risk of these rules being applied. Despite these rules, with the advent of this treaty Hong Kong may prove to be the most tax efficient platform for Canadian business in Asia to date.

[1]A�Titled: Agreement Between the Government of the Hong Kong Special Administrative Region of the Peoplea��s Republic of China and the Government of Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income

[2]A�In particular, where the beneficiary of the interest payments is an entity of the government of either jurisdiction certain conditions may permit the application of a 0% withholding rate for the specific interest payments.

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