July 2014 - Comprehensive taxation agreement with Hong-Kong

The Republic of Korea and Hong-Kong concluded a comprehensive double taxation agreement (“CDTA”) on 8 July 2014.

 

Korea is one of Hong Kong’s major trading partners. From 2008 to 2012, the average annual growth rate in bilateral trade between Hong Kong and Korea was 6% and the average annual growth rate for re-export trade between the Mainland China and Korea through Hong Kong was 9%. During 2013, Korea was the 6th largest trading partner of Hong Kong with a total trade amount of HK$222,838 million and the 7th largest re-exports market of Hong Kong with a re-exports value of HK$63,070 million.

The CDTA will help to further stimulate the economic and trade relationships between Hong Kong and Korea, and provide additional incentives for Korean company to do business or invest in Hong Kong, and vice versa. The CDTA will also provide investors with greater certainty on their potential tax liabilities from cross-border economic activities.

 

Some features for companies:  withholding tax on passive income

 

Hong Kong’s CDTA with Korea offers favourable withholding tax rates on passive income. The following is a summary of the treaty withholding tax rates for dividends, royalties and interests under the CDTA:

  Dividends Royalties Interests
HK non-treaty rate 0%

4.5% / 4.95%

(Note 1)

0%
Korea non-treaty rate 20% 20% 14%-20%
HK-Korea CDTA - treaty rate

10% / 15%

(Note 2)

10% 10%

(Note 1) 4.5% if received by an unincorporated business; 4.95% if received by a corporation.

(Note 2) 10% if received by a company (other than a partnership) holding directly at least 25% of the capital of the paying company; 15% in all other cases.

 

Beneficial owner test and limitation on benefits

It should be noted that when claiming preferential withholding tax rates under the Hong Kong-Korea CDTA, the recipient has to satisfy the beneficial owner test, i.e. the recipient must be the beneficial owner of the passive income.

The CDTA also contains provisions to counteract treaty shopping activities. If the main purpose or one of the main purposes of any person involved in the arrangement is to take advantages of the treaty benefits applicable to passive income, capital gains or other income, the treaty benefits will be denied.

 

Exchange of Information (“EOI”)

The EOI Article provides that information preceeding the date on which the CDTA is in force can be exchanged if the information is foreseeably relevant for a taxable period or event after that date. Moreover, the type of information that could be exchanged may be extended to other types of taxes not covered by the CTDA if the two contracting states agree to the arrangement by means of exchange of letters.

The CDTA will come into force after the completion of ratification procedures in Hong Kong and Korea.

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