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Hong Kong, South Korea Sign DTA

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

10 July 2014


On July 8, Hong Kong's Secretary for Financial Services and the Treasury, Professor K C Chan, and the South Korean Consul-General in Hong Kong, Cho Yong-chun, signed a comprehensive double taxation agreement (CDTA) on behalf of their respective jurisdictions.

Welcoming the agreement, Chan said that it sets out clearly the allocation of taxing rights between the two jurisdictions, so that investors should be able to better assess their potential tax liabilities from cross-border economic activities, and that it should thereby offer added incentives for South Korean companies to do business or invest in Hong Kong, and vice versa.

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

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

Currently, Hong Kong residents receiving interest from South Korea are subject to South Korea's withholding tax, which ranges from 14 percent to 20 percent. Under the CDTA, such withholding tax will be capped at 10 percent. The South Korean withholding tax on royalties, currently at 20 percent, will also be capped at 10 percent, and the South Korean dividends withholding tax on Hong Kong residents will be reduced from the present rate of 20 percent to 15 percent or 10 percent, depending on the percentage of their shareholdings.

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

The new agreement has also incorporated the internationally-agreed standard on exchange of information relating to tax matters.

It will come into force after the completion of ratification procedures on both sides. While it already represents the 30th CDTA that Hong Kong has concluded with its trading partners, the Government has confirmed that Hong Kong is to continue its efforts to expand further its network of CDTAs with trading and investment partners.

TAGS: tax | business | double tax agreement (DTA) | royalties | law | corporation tax | tax credits | agreements | tax rates | withholding tax | Hong Kong | Korea, South | dividends

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