An Update on Hong Kong Double Tax Agreements

Since 2004 the Government of the Hong Kong SAR has negotiated and concluded a number of Double Tax Agreements ("DTAs") with strategic trading and investment partner countries. In general DTA's apply to provide relief in respect of taxes on income and property derived in the treaty partner countries. In the case of Hong Kong the applicable taxes are profits tax, interest tax, salaries tax and property tax.

The standard DTA defines a ‘Permanent Establishment' (‘PE') as a fixed place of business, place of management, branch, office, warehouse, workshop, mine, quarry or a building site if lasting over 6 months, or the provision of services in one jurisdiction for more than 180 days. Income derived from an operation deemed to be a PE is taxable in that jurisdiction even if the owner is a resident of the other jurisdiction. For the purposes of a DTA a Hong Kong resident is defined as an individual living in Hong Kong for 180 days or more; companies, trusts and partnerships will be resident if they are managed or controlled from within Hong Kong.

Following is a brief overview of the DTAs that the Hong Kong SAR has signed to date:

DTA has been successfully negotiated and initialed with Switzerland. The final agreement should be signed and ratified later this year. In addition, broad consensus has been reached on agreements with Austria, France, Hungary, Ireland, Japan and Liechtenstein.

Use of Hong Kong - Luxembourg DTA for Investment from/to European Union Investments into China from Europe

Dividends received by a Luxembourg company are in principle subject to corporate income tax in Luxembourg. However, Luxembourg domestic tax laws provide that dividends paid by a foreign company are fully exempted from income tax in Luxembourg if: (i) the foreign subsidiary is subject to a comparable tax in its jurisdiction of incorporation; and (ii) the Luxembourg parent company has held shares representing at least 10% of the capital of the subsidiary (or shares acquired for an aggregate purchase price of EUR 1,200,000 or its equivalent) for a period of at least 12 months, ( under the DTA the requirement to hold for such a period is waived).

Where the foreign company has its residence outside the EU, the Luxembourg tax authorities consider that a foreign corporate income tax is comparable to the Luxembourg income tax to the extent that: (i) the tax is not optional; (ii) the nominal tax rate is at least 50% of the Luxembourg corporate income tax rate (as the Luxembourg corporate income tax rate is 21%, the foreign tax rate must not be less than 10.5%); and (iii) the rules and criteria to determine the taxable basis are similar to those applicable under Luxembourg tax law.

When commenting on the DTA the Luxembourg government, indicated that the Hong Kong territorial taxation system should not hinder the application of this tax regime. However, satisfaction of the "place of effective management" test will be a material factor in determining that the subsidiary is a Hong Kong resident for the purposes of the DTA.

It should also be noted that it is not necessary that the Hong Kong subsidiary effectively pay a 10.5% tax in Hong Kong. It is sufficient for it to be subject in principle to such tax.

Luxembourg Entities

Luxembourg offers a number of regulated and unregulated investment vehicles for tax effective structuring of investments into Europe. All of these entities are entitled to avail of the benefits of the Hong Kong - Luxembourg DTA. The most commonly used entities will be the SOPARFI or the Société de Gestion de Patrimoine Familial (‘SPF') which replaced the popular 1929 holding company. The SPF which is used in private wealth management, must limit its activities to the acquisition, holding, management and disposal of financial assets and must not conduct any other form of commercial activity. The SPF may hold participations in other companies, or voting rights. A SPF can therefore have a subsidiary in Hong Kong but may not be involved in the management of that subsidiary.

Both the SOPARFI and the SPF are tax exempt entities under Luxembourg tax law with the SOPARFI being used for corporate investments and the SPF for private wealth portfolio investment.

Investments into Europe from outside the EU

As Hong Kong does not impose a tax on dividend income or capital gains, and does not levy a dividend withholding tax, a Hong Kong company is an ideal investment holding vehicle. When combined with an underlying Luxembourg subsidiary company and the application of the DTA, the Hong Kong company has unrivalled attraction as a holding vehicle for investment into Europe.

The combination of Luxembourg participation regime and the European Union parent - subsidiary regime, exempts the Luxembourg company from income tax on dividends received from its subsidiary entities in Europe. The DTA then reduces the Luxembourg dividend withholding tax to 0% when dividends are paid onto the Hong Kong parent company.

Please contact our Hong Kong office at for more details on the above subject.

* Tax Exempt Institution ** signing date; still needs ratification by both countries