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Hong Kong, Canada Sign DTA

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

13 November 2012


In Hong Kong, on November 11, 2012, Secretary for Financial Services and the Treasury, Professor K C Chan, and the Canadian Minister of International Trade, Edward Fast, signed a double taxation agreement (DTA) between Hong Kong and Canada.

Hong Kong’s Chief Executive, C Y Leung, and the Prime Minister of Canada, Stephen Harper, witnessed the signing of the DTA, which is the 26th comprehensive DTA concluded by Hong Kong with its trading partners, while Canada currently has tax treaties in force with 90 countries.

Welcoming the agreement, Chan said that, as 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 will help investors better assess their potential tax liabilities from cross-border economic activities. He added that the agreement should further strengthen the economic and trade ties between the two places, and provide added incentives for companies in Canada to do business or invest in Hong Kong, and vice versa.

Harper stressed that: “Our government is committed to reducing impediments to commerce with our valued commercial partners. The new treaty will reduce tax barriers between Canada and Hong Kong. This will increase trade and investment flows while reducing incidents of double taxation and tax evasion.”

In the absence of a DTA, income earned by Canadian residents in Hong Kong is subject to both Hong Kong and Canadian income tax. Under the agreement, tax paid in Hong Kong will be allowed as a credit against tax payable in Canada.

Furthermore, in the absence of a DTA, the profits of Hong Kong companies doing business through a permanent establishment in Canada may be taxed in both places, if the income is Hong Kong-sourced. Under the agreement, double taxation will be avoided in that any Canada 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.

Again, in the absence of a DTA, Hong Kong residents receiving interest from Canada are subject to Canada's withholding tax, which is 25% at present. Under the agreement, such withholding tax will be capped at 10%. The Canadian withholding tax on royalties, currently at 25%, will be capped at 10%; and the Canadian dividends withholding tax on Hong Kong residents will be reduced from the current rate of 25% to 15%, and will be further lowered to 5% upon fulfilling certain conditions.

Under the DTA, Hong Kong airlines operating flights to Canada will be taxed at Hong Kong's corporation tax rate (which is lower than that of Canada), and will not be taxed in Canada. Profits from international shipping transport earned by Hong Kong residents that arise in Canada, which are currently subject to tax there, will also not be taxed in Canada under the agreement.

The DTA, which also incorporates the internationally-agreed standard for exchange of information for tax purposes, will come into force after the completion of ratification procedures on both sides.

TAGS: tax | investment | business | double tax agreement (DTA) | interest | royalties | commerce | law | corporation tax | agreements | tax rates | withholding tax | Canada | Hong Kong | dividends | individual income tax

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