INDIA- HONG KONG DOUBLE TAXATION AVOIDANCE AGREEMENT

The government of India and the government of the Hong Kong Special Administrative Region of People’s Republic of China (‘Hong Kong”) signed a Double Taxation Avoidance Agreement (“DTAA”) on 18 March, 2018 which came into force from 01 April, 2019. India-Hong Kong DTAA are aligned 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”) in order to curb tax evasion/ avoidance, treaty shopping practices, conduit companies practices, etc.  

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; and
  • property tax.

Key takeaways

• Capital gain arising on sale of shares of an Indian company to be chargeable to tax in India.
• Capital gain arising on sale of Indian securities (other than shares eg. derivatives, debt securities, etc.) to be chargeable to tax in India.
• Interest income to be taxed at the rate of 10% subject to satisfying beneficial ownership test.
• Fees for technical services payable to a resident of Hong Kong to be taxed at the rate of 10% subject to the satisfaction of beneficial ownership test.
• In addition to a fixed place as permanent establishment (“PE”), the DTAA covers other forms of PE such as construction PE, service PE and agency PE. These provisions are comparable to the United Nations (UN) Model Treaty.
• Other income arising in India will be chargeable to tax in India.
• Articles of the DTAA are aligned to the provisions of Multilateral Instrument to implement tax treaty related measures to prevent base erosion and profit shifting.

 Inference

The tax treaty provides beneficial withholding rates in case of dividend, interest, royalty, and fees for technical services. However, such beneficial provisions are subject to anti-avoidance provisions. Aside from tax relief and lower withholding tax rates, the DTAA additionally offers a lower dividend distribution tax which is an additional tax levied on businesses. The DTAA also consists of a limitation of benefit clause. The treaty provides for tax credit in respect of taxes paid in a country so as to reduce the tax burden on the taxpayers. Further, an exchange of interest clause has been inculcated in the DTAA on the premise that it will help both the states to comply with international standards with respect to transparency and reducing tax evasion.