Hong Kong, Japan DTA Comes Into Effect

by Mary Swire, Tax-News.com, Hong Kong

17 August 2011

Hong Kong’s Inland Revenue Department has announced that the double taxation agreement (DTA) between Hong Kong and Japan, which was signed on November 9 last year, came into effect on August 14, 2011.

According to the terms of the DTA, it entered into force 30 days after written notification by both parties of the completion of their respective required approval procedures. It will have effect in Hong Kong for any year of assessment beginning on or after April 1, 2012.

The DTA sets out clearly the allocation of taxing rights between the two jurisdictions and the relief on tax rates on different types of passive income. It is said that it will help investors better assess their potential tax liabilities from cross-border economic activities, foster closer economic and trade links between the two places, and provide added incentives for companies in Japan to do business or invest in Hong Kong, and vice versa.

In the absence of a DTA, the profits of Hong Kong companies doing business through a permanent establishment, such as a sales outlet in Japan, may be taxed in both places if the income is Hong Kong-sourced. Under the agreement, double taxation will be avoided in that any Japanese tax paid by the companies will be allowed as a credit against the tax payable in Hong Kong in respect of the income, subject to the provisions of the tax laws of Hong Kong.

Furthermore, before the operation of the agreement, Hong Kong residents receiving dividends from Japan not attributable to a permanent establishment in Japan are subject to a Japanese withholding tax, which is currently set at 20%. Under the agreement, such withholding tax is capped at 5% for a company holding (directly or indirectly) for a period of six months at least 10% of the voting shares of the company paying the dividends, and 10% for other cases.

Hong Kong residents receiving royalties from Japan are subject to a current withholding tax at 20% in Japan. Under the DTA, the withholding tax on royalties will be capped at 5%. The Japanese interest withholding tax on Hong Kong residents will be reduced from the current rate of 20% to 10%.

The agreement also incorporates the latest Organization for Economic Cooperation and Development standards on exchange of information for tax purposes.

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