United Kingdom: UK and Hong Kong double tax agreement comes into force
The double tax agreement between the United Kingdom and the Hong Kong Special Administrative Region, which was signed on 21 June 2010, came into force on 20 December 2010.
The treaty will be effective in the UK from 1 April 2011 for corporation tax, from 6 April 2011 for income and capital gains tax and in Hong Kong from 1 April 2011. Key points of interest include:
- A non-standard tie-break test for determining residence for treaty purposes. A zero rate of withholding tax on dividends (except for Real Estate Investment Trusts (REITs).
- A zero rate of withholding tax on interest but with a provision to ensure the benefits of the interest article can only flow to residents of the other state.
- An unusual stipulation in relation to the taxing rights for employment income.
- The assignment of pension taxing rights to the territory of source rather than the territory of residence.
- No option to claim a UK personal allowance for non-UK residents who are not UK nationals.
Background
The United Kingdom and the Hong Kong Special Administrative Region of China signed a double tax agreement on 21 June 2010 in London. Following the completion of the parliamentary procedures of both territories and the exchange of diplomatic notes, this came into force on 20 December 2010.
The treaty will be effective in the UK from 1 April 2011 for corporation tax, from 6 April 2011 for income and capital gains tax and in Hong Kong from 1 April 2011.
This is the first double tax agreement between the UK and the Hong Kong Special Administrative Region since Hong Kong became a special administrative region of China in 1997.
Key aspects of the treaty
Specific points of interest include:
Residence (Article 4)
As Hong Kong does not tax on the basis of residence, this article includes a specific set of definitions to determine when an individual is deemed to be resident in Hong Kong. Also, this article does not follow the normal OECD standard treaty tie-break test. Where an individual is resident in both territories under domestic legislation, the territory of residence for treaty purposes is determined by examining where the individual has a permanent home, then where their centre of vital interest lies, before examining their habitual abode and finally nationality. If none of these factors determine residence it is down to the tax authorities to reach agreement between themselves.
However, in this treaty, where an individual does not have a permanent home in either territory, centre of vital interests is ignored and habitual abode is the next item examined. There is no clause for nationality, so if nothing can be determined under habitual abode, it is down to the tax authorities to reach agreement.
Dividends (Article 10)
There is a 0% rate of withholding on dividends except for REITs on which a 15% rate of withholding applies.
Interest (Article 11)
There is a 0% withholding rate on interest paid to a resident of the other Party.
Income from employment (Article 14)
As expected, the employment income article contains provisions to allow short term business visitors to claim exemption from tax in the other territory provided they meet certain conditions. In addition to the normal conditions, there is an unusual clause whereby earnings are excluded from tax in the territory of source only where the remuneration is taxable in the first territory according to the laws in force in there. This is presumably designed to cater for the situation where an individual is claiming time-apportionment in Hong Kong or the remittance basis in the UK.
Pensions (Article 17)
The right to tax a pension lies with the territory of source rather than the territory of residence.
Non-discrimination (Article 22)
Under this article, non-UK nationals who are not resident in the UK are not entitled to a personal allowance.
Next steps
Employers and individuals involved in assignments between the UK and Hong Kong should review the effect on their assignment and remuneration arrangements now that the new treaty has come into force.
Source: Ernst & Young