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India-Hong Kong Double Taxation Avoidance Agreement (DTAA)

The India-Hong Kong Double Taxation Avoidance Agreement (DTAA) is a significant bilateral agreement signed between the governments of India and the Hong Kong Special Administrative Region of the People’s Republic of China. This agreement is designed to prevent double taxation and enhance cooperation in tax matters. The DTAA was signed on 18 March 2018 and came into force on 1 April 2019. It aligns with global efforts to combat tax evasion, treaty shopping practices, conduit company practices, and is in compliance with Base Erosion and Profit Shifting (BEPS) and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).

Applicability

The DTAA applies to the following taxes in the contracting states:

In India:

  • The income tax, including any surcharge thereon.

In Hong Kong:

  • Profits tax.
  • Salaries tax.
  • Property tax.

Key Takeaways

Here are the key takeaways from the India-Hong Kong DTAA:

  1. Capital Gains on Sale of Shares: Capital gains arising from the sale of shares of an Indian company are chargeable to tax in India.
  2. Capital Gains on Sale of Indian Securities: Capital gains from the sale of Indian securities, other than shares (e.g., derivatives, debt securities, etc.), are also chargeable to tax in India.
  3. Interest Income: Interest income is taxed at a rate of 10% subject to satisfying the beneficial ownership test.
  4. Fees for Technical Services: Fees for technical services payable to a resident of Hong Kong are taxed at a rate of 10%, subject to the satisfaction of the beneficial ownership test.
  5. Permanent Establishment (PE): In addition to a fixed place as a permanent establishment, the DTAA covers other forms of PE, including construction PE, service PE, and agency PE. These provisions are comparable to the United Nations (UN) Model Treaty.
  6. Taxation of Other Incomes: Other income arising in India is chargeable to tax in India.
  7. International Compliance: The articles of the DTAA align with the provisions of the Multilateral Instrument (MLI) to implement tax treaty-related measures to prevent base erosion and profit shifting.

Inference

The India-Hong Kong DTAA offers favorable withholding rates for dividends, interest, royalties, and fees for technical services. However, these provisions are subject to anti-avoidance measures. The agreement also provides a lower dividend distribution tax, which is advantageous for businesses.

The DTAA contains a limitation of benefits clause to prevent misuse and abuse of the treaty’s provisions. It facilitates tax credits to reduce the tax burden on taxpayers in both countries and includes an exchange of information clause to ensure transparency and reduce tax evasion.

For comprehensive legal advice or additional information regarding the India-Hong Kong Double Taxation Avoidance Agreement or other legal matters, please feel free to contact Chandrawat & Partners. Our legal experts specialize in international tax agreements and are dedicated to providing tailored legal assistance to meet your specific needs.

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To know more about DTAA relations between India and Hong Kong, please download our Guide.

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