Executive summary

On 24 November 2017, the income tax treaty between Hong Kong and Latvia (the Treaty), signed on 13 April 2016, entered into force.¹ The Treaty will be effective for Hong Kong tax for any year of assessment beginning on or after 1 April 2018, and for Latvia, for taxable years beginning on or after 1 January 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 Latvia 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 Latvia if such site, project or activities last more than 9 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 Latvia if the services continue (for the same or a connected project) for a period or periods exceeding in the aggregate 6 months within any 12-month period.

Exemption or reduction of tax on dividends, interest and royalties – Articles 10, 11 and 12

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

Capital gains – Article 13

Capital gains derived by a Hong Kong resident investor on the disposal of shares in a Latvian entity will generally be exempt from tax in Latvia, 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 Latvia.

Mutual agreement procedure – Article 23

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

———————————————
ENDNOTES

¹ See EY Global Tax Alert, Hong Kong and Latvia sign income tax treaty, dated 22 April 2016.

² A 0% rate applies if the beneficial owner of the dividend is a company (other than a partnership), the Hong Kong Government, the Hong Kong Monetary Authority, the Exchange Fund, any institution wholly or mainly owned by the Hong Kong Government as may be agreed from time to time between the competent authorities of the contracting parties, or a pension fund or scheme. For all other cases, a 10% rate applies.

³ A 0% rate applies if the beneficial owner of the interest is a company (other than a partnership), the Hong Kong Government, the Hong Kong Monetary Authority, the Exchange Fund, any institution wholly or mainly owned by the Hong Kong Government as may be agreed from time to time between the competent authorities of the contracting parties, or a pension fund or scheme. For all other cases, a 10% rate applies.

⁴ A 0% rate applies if the beneficial owner of the royalties is a company (other than a partnership). For all other cases, a 3% rate applies.

———————————————
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

———————————————
ATTACHMENT

PDF version of this Tax Alert