Hong Kong and India sign income tax treaty - EY
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28 March 2018
Global Tax Alert
Hong Kong and
India sign income
tax treaty
Executive summary
EY Global Tax Alert Library On 19 March 2018, representatives of Hong Kong and India signed their first
Access both online and pdf versions comprehensive income tax treaty (the Treaty). The Treaty will stimulate flow of
of all EY Global Tax Alerts. investment, technology and personnel from Hong Kong to India and vice versa,
prevent double taxation and provide for the exchange of information between
Copy into your web browser: the two countries. It will improve transparency in tax matters and help to curb
www.ey.com/taxalerts tax evasion and tax avoidance.
Provisions of the Treaty are based on the Organisation for Economic Co-operation
and Development Model Treaty (the OECD Model Treaty) 2017 and the United
Nations Model Treaty (the UN Model Treaty) 2011, providing greater taxation
rights for the source country.
Significant provisions in the Treaty are:
• Source country taxation rights on capital gains from the transfer of shares
• Beneficial rate of taxation of dividends at the rate of 5% on the gross dividend
and 10% on gross interest, royalties, fees for technical services (FTS)
• Certain provisions are influenced by the OECD’s Multilateral Instrument (MLI)
on Base Erosion and Profit Shifting (BEPS) such as the principal purpose test
(PPT), competent authority (CA) rule such as the tie-breaker test for dual
resident entities, mutual agreement procedure (MAP) provisions, corresponding
adjustments in transfer pricing cases, among others2 Global Tax Alert
• The benefit of provisions on dividends, interest, royalties, an independent agent. Unlike the UN Model Treaty,
FTS, and capital gains has been made subject to the ”main the additional condition of satisfying an arm’s-length
or one of the main purposes” test which is in addition to a requirement for qualifying as an independent agent,
general rule on the lines of the PPT of the MLI is absent in the Treaty.
• Authority is given to anti-avoidance provisions under the • Certain activities are listed as exempt from creating a PE
domestic laws such as storage, display, maintenance of stock for storage,
display or processing, purchasing goods or merchandize or
The Treaty will enter into force after the completion of
collecting information, and other preparatory or auxiliary
ratification procedures by both countries. It will become
activities.
effective for tax years beginning on or after 1 April
following the date in which the Treaty enters into force.
Business income (Article 7)
This Alert summarizes the key provisions of the Treaty. Article 7 of the Treaty provides for source taxation of
business profits to the extent attributable to a PE in the
Detailed discussion source country. The provision generally follows Article 7 of
the UN Model Treaty but the force of attraction rule is absent
Tie-breaker test for dual residency (Article 4) in the Treaty. Further, unlike the UN Model Treaty, the Treaty
Pursuant to the OECD’s Model Treaty, residency status of a does not restrict deductibility of expenses payable to a head
person other than an individual will be determined by the office in the form of royalties, fees, commission, etc. The
MAP, based on its place of effective management, place of Treaty also contains the exclusion for purchasing activity.
incorporation or constitution, and any other relevant factors. This provision is not present in the UN or the OECD Model
This provision follows the MLI. In the absence of the MAP, Treaties.
dual residents are not entitled to any relief or exemption from
tax under the Treaty, except as may be agreed by the CAs. Associated Enterprises (AEs) – Corresponding
adjustment related to transfer pricing provision
Permanent establishment (PE) (Article 5) (Article 9)
• In addition to a fixed place PE, the Treaty covers other The Treaty provides that a corresponding adjustment may be
forms of PE such as Construction PE, Service PE and made in the profits of AE in the other Contracting State:
Agency PE. These provisions are comparable to the UN • Where an adjustment has been made by a country to the
Model Treaty. profits of a resident, based on an arm’s-length condition
• The Treaty provides a six-month threshold for a Construction and taxes are levied on such adjusted profits adjusted; and
PE that includes a building site, assembly or installation • Such profits are also taxed in the hands of the AE in the
project or supervisory activities. other Contracting State.
• A Service PE is created when services, including consultancy This provision relieves double taxation in the other Contracting
services, are furnished for the same or a connected project State and is in line with India’s commitment made as part of
for an aggregate period of more than 183 days within any Action 14 on dispute resolution mechanism of the BEPS plan.
12-month period.
• The Agency PE definition covers authority to conclude Taxation of dividends (Article 10), interest
contracts (except preparatory or auxiliary activities), (Article 11), royalties (Article 12), and FTS
maintaining stock of goods/merchandize for regular (Article 13)
delivery and securing orders wholly or almost wholly for Passive streams of income like dividends, interest, royalties
the principal or its associated enterprises. The provision and FTS are generally taxable in the resident country. Such
does not incorporate the MLI recommended provisions income may also be taxed in the source country at a tax rate
on Agency PE. of 5% on dividends and 10% on interest, royalties and FTS on
• The Treaty also states that where the activities of an a gross basis.1 If such incomes is effectively connected to a
agent are devoted wholly and almost wholly on behalf PE in the source country, Article 7 will govern the taxation
of the enterprise, the agent will not be considered as on the net basis.Global Tax Alert 3
The beneficial tax rates will not be available, however, if the Elimination of double taxation (Article 23)
main purpose or one of the main purposes of any person To eliminate the double taxation on a person, both countries
concerned with the creation or assignment of shares or allow a foreign tax credit for the taxes paid in the other
other rights or debt or royalty rights or performance of country.2
services is to take advantage of these Articles by means
of such arrangement. This is similar to the PPT in the MLI. MAP (Article 25)
Definitions of royalty and FTS are similar to those in the UN The Treaty provides for MAP similar to the MLI provision.
and the OECD Model Treaties. However, the Treaty does not Among other things, it states that a taxpayer may present
include a condition of “make available” with respect to FTS, its case to a CA in its resident country within three years
accordingly, its scope is much broader compared to other from the first notification of the action resulting in taxation.
treaties with such condition. The CA would work together to resolve the case by a mutual
agreement to be implemented notwithstanding any time
Capital gains (Article 14) limits in the domestic laws.
• Capital gains arising from the sale of immovable property
and from the sale of shares of a company which derives Anti-avoidance provisions (Article 28)
more than 50% of its asset value directly or indirectly from The provisions of the Treaty will not prevent a country from
immovable property will be taxed in the country where the the application of its domestic law and measures concerning
immovable property is situated. tax avoidance or evasion.
• The source country where the company is a resident retains Treaty benefits will not be granted if the main purpose or
a taxing right on capital gains from sale of other shares in a one of the main purposes of any persons is non-taxation or
company. reduced taxation through tax evasion or avoidance, including
• Each country will determine taxability of any other property through treaty-shopping arrangements. This provision is
in accordance with the provisions of its domestic laws. comparable to the PPT rule as well as the language of the
Preamble to the BEPS Action 6 in the MLI.
Similar to other passive income streams, benefits under this
Article are also subject to the ”main purpose or one of the Cases of legal entities not having bona fide business activities
main purposes” test. will also be covered under the provisions.
Endnotes
1. Under Hong Kong’s domestic law, an Indian resident is not subject to withholding tax on dividends, interest or FTS in
Hong Kong, while royalties are subject to a 4.95% Hong Kong withholding tax.
2. Under Hong Kong’s domestic law, the amount of tax credit is limited to the Hong Kong profits tax payable in respect of
the same income.4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young LLP, Indian Tax Desk, New York • Riad Joseph riad.joseph1@ey.com • Sameep Uchil sameep.uchil@ey.com Ernst & Young LLP, Hong Kong Tax Desk, New York • Charlotte Wong charlotte.wong1@ey.com Ernst & Young LLP, Indian Tax Desk, Chicago • Roshan Samuel roshan.samuel1@ey.com Ernst & Young LLP, Indian Tax Desk, San Jose • Archit Shah archit.shah@ey.com Ernst & Young LLP, Indian Tax Desk, Dallas • Monika Wadhwa monika.wadhwa1@ey.com Ernst & Young Solutions LLP, Indian Tax Desk, Singapore • Gagan Malik gagan.malik@sg.ey.com Ernst & Young LLP (United Kingdom), Indian Tax Desk, London • Amit B Jain amit.b.jain1@uk.ey.com Ernst & Young Tax Services Limited, Hong Kong • Tracy Ho tracy.ho@hk.ey.com • Florence Chan, Financial Services florence.chan@hk.ey.com Ernst & Young LLP, Asia Pacific Business Group, New York • Chris Finnerty chris.finnerty@ey.com • Kaz Parsch kazuyo.parsch@ey.com • Bee-Khun Yap bee-khun.yap@ey.com
EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2018 EYGM Limited. All Rights Reserved. EYG no. 01724-181Gbl 1508-1600216 NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com
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