Executive summary

On 24 November 2017, the income tax treaty between Hong Kong and Pakistan (the Treaty), signed on 17 February 2017, entered into force. The Treaty will be effective for Hong Kong tax for any year of assessment beginning on or after 1 April 2018 and for Pakistan, for taxable years beginning on or after 1 July 2018.

This Alert highlights the key treaty provisions.

Detailed discussion

Permanent establishment (PE) – Article 5

In addition to the general definitions of the term PE, a Hong Kong resident enterprise will be considered as maintaining a PE in Pakistan in the following situations:

• A building site or construction, assembly or installation project or supervisory activities in connection therewith, of a Hong Kong resident enterprise will only constitute a PE in Pakistan if such site, project or activities last more than 6 months (this is shorter than the 12-month period provided under the Organisation for Economic Co-operation and Development Model).
• The furnishing of services, including consultancy services, by a Hong Kong resident enterprise through employees or other personnel engaged for such purpose will only constitute a PE in Pakistan if the services continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any 12-month period.

Exemption or reduction of tax on passive income streams – Articles 10, 11, 12 and 13

Subject to specific anti-avoidance provisions, the following table summarizes the applicable withholding rates for the passive income received from Pakistan by a Hong Kong resident as the beneficial owner.

Hong Kong does not impose any withholding tax on dividend and interest received by a Pakistan resident. However, there is a 4.95%² domestic withholding tax on Hong Kong source royalties on certain intellectual properties received by a Pakistan resident.

Capital gains – Article 14

Capital gains derived by a Hong Kong resident on the disposal of shares in a Pakistani entity will generally be exempt from tax in Pakistan, unless the shares being disposed of are in respect of a company which derives more than 50% of its asset value directly or indirectly from immovable property situated in Pakistan.

Mutual agreement procedure – Article 25

A resident of either jurisdiction may present its case within three years from the first notification of the action resulting in double taxation.

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ENDNOTES

¹ A 0% rate applies if the beneficial owner of the interest is the Hong Kong Government, the Hong Kong Monetary Authority, the Exchange Fund, or any entity wholly or mainly owned by the Hong Kong Government or any political subdivision of local authority thereof and mutually agreed upon by the competent authorities of the contracting parties. For all other cases, a 10% rate applies.

² A 16.5% domestic withholding rate applies if the royalties are paid to an associate and a person carrying on a trade, profession or business in Hong Kong has at any time wholly or partly owned the intellectual property.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

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, Hong Kong Tax Desk, New York

• Charlotte Wong
  charlotte.wong1@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

Ernst & Young LLP, Asia Pacific Business Group, Houston

• Trang Martin
  trang.martin@ey.com

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ATTACHMENT

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