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Hong Kong Tax Alert 4 September 2020 2020 Issue No Hong Kong Tax Alert 4 September 2020 2020 Issue No. 12 Hong Kong concludes comprehensive double taxation arrangement with Serbia On 27 August 2020, Hong Kong signed a comprehensive avoidance of double taxation agreement (CDTA) with Serbia. This brings the number of CDTAs Hong Kong has concluded with other jurisdictions to 44. Appendix to this alert summarizes the status of Hong Kong’s current CDTA network and CDTAs currently under negotiation or pending ratification. This alert summarizes the salient points of the provisions of the CDTA with Serbia as applicable to Hong Kong residents. Promoting trade and investment The CDTA sets out clearly the allocation of taxing rights between Hong Kong and Serbia helping investors to better assess their potential tax liabilities from cross-border transactions. In addition, with the aim of facilitating trade and investment, the CDTA also contains provisions which reduce or eliminate applicable taxes in respect of certain income streams between the two jurisdictions. The below table summarizes the applicable rates for relevant income streams when received from Serbia by a Hong Kong resident as beneficial owner. Income Dividends Interest Royalties Capital gains on Fees for specified streams disposal of shares services Tax rate Domestic rates 15/20%1 15/20%1 20% 0/15%/20%1 20%6 Rates under the 5/10%2 0/10%3 5/10%4 0%5 0% CDTA Notes 1. Dividends, interest and capital gains received from Serbia by a non-resident individual are taxed at a rate of 15%; however capital gains realized on disposal of shares by a non-resident individual who has held the investment continuously for at least ten years prior to the transfer are exempt from taxation in Serbia. Non- individual recipients of these income items will be taxed at 20%. 2. A 5% rate applies if the beneficial owner is a company which holds directly at least 25% of the capital of the company paying the dividends throughout a 365 day period that includes the day of the payment of the dividends (for the purpose of computing that period, no account shall be taken of changes of ownership that would directly result from a corporate reorganization, such as a merger or divisive reorganization of the company that holds the shares or that pays the dividend). 3. A 0% rate applies if the interest is paid by the Government of the Republic of Serbia or political subdivisions or local authorities thereof, or the National bank of Serbia, and the recipient is the HKSAR Government, Hong Kong Monetary Authority or the Exchange Fund. 4. A 5% rate applies if the royalties are paid for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or films or tapes used for radio or television broadcasting; a 10% rate applies if the royalties are paid for the use of, or the right of use, any patent, trademark, design or model, plan, secret formula or process, or for the use of or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 5. Capital gains on the disposal of shares in a Serbian company or comparable interests of any kind, including interests in a partnership or trust, derived by a Hong Kong resident investor will generally be exempt from tax in Serbia under the CDTA. The only exception to this is if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50% of their value directly or indirectly from immovable property situated in Serbia. 6. Fee payments related to market research services, accounting and audit services, and other legal and business advisory services are subject to a withholding tax. Under the CDTA, if the fee payments are not attributable to a permanent establishment or a fixed base that a Hong Kong resident maintains in Serbia, the payments will not be subject to the withholding tax. Avoidance of double taxation Where the income of a Hong Kong resident is subject to tax in both Hong Kong and Serbia, the Hong Kong resident can credit the tax paid in Serbia on the relevant income against the Hong Kong tax liability arising on the same income. The available tax credit is, however, limited to the Hong Kong tax charged on the same income. Prevention of treaty abuse Preventing the artificial avoidance of a permanent establishment The CDTA has adopted the recommendations made by the Organisation for Economic Co-operation and Development in their “Base Erosion and Profit Shifting (BEPS) Action 7 Final Report (Preventing the Artificial Avoidance of a Permanent Establishment Status)”. The anti-avoidance provisions of the CDTA include counteracting the splitting up of construction contracts, anti-fragmentation provisions and lowering the threshold for dependent agency permanent establishment. Other provisions against treaty abuse The CDTA contains the following specific provisions against treaty abuse: (i) an introductory statement or preamble specifying that the CDTA is intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance; (ii) the principal purpose test (PPT) provisions whereby the granting of tax benefits under the CDTA would be denied if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining the benefits was one of the principal purposes of any arrangement or transaction. The PPT would not however apply where it is established that granting the tax benefits in the circumstances would be in accordance with the object and purpose of the relevant provisions of the CDTA.; and (iii) an explicit clause stating that the terms of the CDTA shall not override the anti-avoidance provisions contained in the domestic tax legislation of one side. Effective date of the CDTA The CDTA will only come into force in the tax year following the calendar year in which the relevant ratification procedures are completed. If the ratification procedures can be completed in 2020, the CDTA shall then have effect as follows: a) For Hong Kong: for any year of assessment beginning on or after 1 April 2021 b) For Serbia: for any income year beginning on or after 1 January 2021 Hong Kong Tax Alert 2 Appendix I – Latest status of the Hong Kong’s CDTA network 43 CDTAs signed and ratified Country / jurisdiction Effective in Hong Kong Effective in the other contracting from the year of assessment party from the year of assessment 1. Austria 2012/13 1 January 2012 2. Belarus 2018/19 1 January 2018 3. Belgium 2004/05 1 January 2004 4. Brunei 2011/12 1 January 2011 5. Cambodia 2020/21 1 January 2020 6. Canada 2014/15 1 January 2014 7. Czech Republic 2013/14 1 January 2013 8. Estonia 2020/21 1 January 2020 9. Finland 2019/20 1 January 2019 10. France 2012/13 1 January 2012 11. Guernsey 2014/15 1 January 2014 12. Hungary 2012/13 1 January 2012 13. India 2019/20 1 April 2019 14. Indonesia 2013/14 1 January 2013 15. Ireland 2012/13 1 January 2012 16. Italy 2016/17 1 January 2016 17. Japan 2012/13 1 January 2012 18. Jersey 2014/15 1 January 2014 19. Korea 2017/18 1 January 2017 20. Kuwait 2014/15 1 January 2014 21. Latvia 2018/19 1 January 2018 22. Liechtenstein 2012/13 1 January 2012 23. Luxembourg 2008/09 1 January 2008 24. Macau SAR 2021/22 1 January 2021 25. Mainland China 2007/08 1 January 2007 26. Malaysia 2013/14 1 January 2013 27. Malta 2013/14 1 January 2013 28. Mexico 2014/15 1 January 2014 29. Netherlands 2012/13 1 January 2012 30. New Zealand 2012/13 1 April 2012 31. Pakistan 2018/19 1 July 2018 32. Portugal 2013/14 1 January 2013 33. Qatar 2014/15 1 January 2014 34. Romania 2017/18 1 January 2017 35. Russian Federation 2017/18 1 January 2017 36. Saudi Arabia 2019/20 1 January 2019 37. South Africa 2016/17 1 January 2016 38. Spain 2013/14 1 April 2013 39. Switzerland 2013/14 1 January 2013 40. Thailand 2006/07 1 January 2006 41. United Kingdom 2011/12 1 or 6 April 2011 42. United Arab Emirates 2016/17 1 January 2016 43. Vietnam 2010/11 1 January 2010 1 CDTAs signed but pending ratification ► Serbia 13 CDTAs under negotiation ► Bahrain, Bangladesh, Cyprus, Georgia, Germany, Israel, Lithuania, Maldives, Mauritius, Nigeria, North Macedonia, Norway and Turkey Hong Kong Tax Alert 3 Hong Kong office Agnes Chan, Managing Partner, Hong Kong & Macau 22/F, CITIC Tower, 1 Tim Mei Avenue, Central, Hong Kong Tel: +852 2846 9888 / Fax: +852 2868 4432 Ian McNeill Deputy Asia-Pacific Tax Leader +852 2849 9568 [email protected] Non-financial Services Financial Services David Chan Paul Ho Tax Leader for Hong Kong and Macau Tax Leader for Hong Kong +852 2629 3228 +852 2849 9564 [email protected] [email protected] Business Tax Services / Global Compliance and Reporting Business Tax Services / Global Compliance and Reporting Hong Kong Tax Services Hong Kong Tax Services Wilson Cheng Tracy Ho May Leung Paul Ho Sunny Liu +852 2846 9066 +852 2846 9065 +852 2629 3089 +852 2849 9564 +852 2846 9883 [email protected] [email protected] [email protected] [email protected] [email protected] Ada Ma Grace Tang Karina Wong China Tax Services +852 2849 9391 +852 2846 9889 +852 2849 9175 [email protected] [email protected] [email protected] Cindy Li +852 2629 3608 [email protected] China Tax Services US Tax Services Ivan Chan Lorraine Cheung Sam Fan Michael Stenske +852 2629 3828 +852 2849 9356 +852 2849 9278 +852 2629 3058 [email protected] [email protected] [email protected] [email protected] International Tax and Transaction Services
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