Changes in Hong Kong Tax Law by Simon Rae
Hong Kong?s tax system has been somewhat dormant as of late but 2005 has produced a number of proposals for tax changes, some of which are designed to fulfill the Hong Kong Government?s policy of enhancing Hong Kong?s prominence as an international financial centre as outlined in the Budget Speech of the Financial Secretary on 16 March, 2005. The proposals lead to (i) the abolition of estate duty; (ii) the exemption of mutual funds from Hong Kong taxation and (iii) the signing of the double taxation agreement between Hong Kong and Thailand.Abolition of Estate Duty The Revenue (Abolition of Estate Duty) Ordinance (?the Ordinance?) was passed into law by the Legislative Council on 2 November, 2005 and was gazetted on 11 November, 2005. The Ordinance takes effect from 11 February, 2006, and estate duty shall not be charged on the estates of persons who die after that date. In the case of persons who die between 15 July, 2005 and 11 February, 2006, estate duty will be charged at a nominal sum of HK$100.00. The reason for this unusual feature is that the Ordinance has an impact on other legislation, particularly that relating to probate administration. Now that estate duty is in its final phase, this could pave the way for an increasing role for Hong Kong to develop as an international financial service centre. Hong Kong is well placed to take advantage in this area and it is hoped that there will be new legislation introduced in order to assist in Hong Kong?s development in the global financial services arena.Thailand/Hong Kong Double Taxation Treaty On 7 September, 2005, Hong Kong entered into a comprehensive Double Tax Agreement (?DTA?) with the Kingdom of Thailand. This is the first DTA which Hong Kong has entered into with an Asian country and the second treaty which Hong Kong has signed, the first DTA being signed with Belgium. The treaty comes into force in Thailand on 1 January, 2006 and in Hong Kong on 1 April, 2006. Given that there has been a substantial amount of investment in Thailand by Hong Kong businesses generally, the Hong Kong/Thailand treaty should be a useful tool in Hong Kong/Thai tax planning. The Agreement shall apply to the following taxes:- (i) in Hong Kong – profits tax; salaries tax; and property tax. (ii) in Thailand – income tax; and petroleum income tax. The Agreement also applies to any identical or substantially similar taxes which are imposed after the date of the Agreement by either Contracting Party. Article 7 provides that the profits of an enterprise of a Contracting Party shall be taxable only in that Contracting Party unless the enterprise carries on business in the other Contracting Party through a permanent establishment situated therein. If the enterprise carries on business accordingly, the profits of the enterprise are taxed in the other Contracting Party but only to the extent that they are attributable to the permanent establishment. There are certain reliefs in respect of:- (i) shipping – the tax is reduced by 50%; (ii) dividends – the tax charged shall not exceed 10% of the gross amount of the dividends; (iii) interest –
the tax charged shall not exceed 10% if the interest is beneficially owned by any financial institution or insurance company; – the tax charged shall not exceed 10% if the interest is beneficially owned by a resident of the other Contracting Party and is paid with respect to indebtedness arising as a consequence of a sale on credit by a resident of that other Contracting Party of any equipment, merchandise or services except where the sale is between persons not dealing with each other at arm’s length; and – 15% of the gross amount of interest; in all other cases interest is exempt from tax if it is paid to (a) in the case of Hong Kong to (i) the Hong Kong Government; (ii) the Hong Kong Monetary Authority; (iii) to a financial institution appointed by the Hong Kong Government and mutually agreed by the competent authorities of the Contracting Parties. (b) in the case of Thailand to (i) the Government of the Kingdom of Thailand; (ii) any local authority; (iii) the Bank of Thailand; (iv) the Export-Import Bank of Thailand; (v) a financial institution appointed by the Thailand Government and mutually agreed upon by the competent authorities of the two Contracting Parties.
(iv) royalties –
royalties arising in a Contracting Party and paid to a resident of the other Contracting Party may be taxed in that other Contracting Party. However, royalties may also be taxed in the Contracting Party in which they arise but if the beneficial owner is also a resident of the other Contracting Party, the tax charged shall not exceed:- (a) 5% of the gross amount of the royalties if they are made as a consideration for the use of, or right to use, any copyright of literary, artistic or scientific work; (b) 10% of the gross amount of the royalties if they are made as a consideration for the use of, or right to use, any patent, trademark, design or model, plan, secret formula or process; and (c) 15% of the gross amount of the royalties in all other cases.
Royalties are defined as payments of any kind received as a consideration 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, any patent, trademark, design or model, plan, secret formula or process, or the for the use of or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience.