Executive summary

On 24 May 2018, Hong Kong signed an income tax treaty (the Treaty) with Finland. The Treaty contains several favorable provisions which are expected to facilitate closer economic and trade ties between Hong Kong and Finland.

This Alert summarizes the key points of the Treaty.

Detailed discussion

Permanent establishment (PE) – Article 5

• A building site or construction, assembly or installation project or supervisory activities in connection therewith will only constitute a PE if such site, project or activities last more than nine months.
• Furnishing of services, including consultancy services through employees or other personnel engaged for such purpose that continue (for the same or a connected project) for a period or periods exceeding in the aggregate 270 days within any 12-month period will also establish a PE.

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

Subject to specific anti-avoidance provisions, the table below summarizes the applicable withholding rates for the passive income received from Finland by a Hong Kong beneficial owner resident. However, under Hong Kong's domestic law, a Finnish resident is not subject to withholding tax on dividends or interest in Hong Kong; while royalties subject to Hong Kong's 4.95% statutory withholding tax will be reduced to 3%.

1. Under the domestic tax law of Finland, the withholding tax rate for a non-corporate entity recipient is 30%.

2. Interest paid to nonresidents is generally exempt from tax unless the loan may be deemed comparable to an equity investment.

3. A 5% rate applies if the beneficial owner of the dividends is a company (other than a partnership) which controls directly at least 10% of the voting power of the company paying the dividends. For other cases, a 10% rate applies.

Capital gains – Article 13

Capital gains derived by a Hong Kong resident on the disposal of shares in a Finnish company will generally be exempt from tax in Finland, unless the shares represent substantial immovable property located in Finland. Hong Kong however does not impose a capital gains tax on any share disposition by a Finnish resident under Hong Kong's domestic law.

Anti-avoidance provisions – Article 21

Treaty benefits would be denied if it is reasonable to conclude, considering all relevant facts and circumstances, that obtaining the benefits was one of the principal purposes of any arrangement or transaction, unless it is established that granting the tax benefits in the circumstances would be in accordance with the objective and purpose of the relevant provisions of the Treaty. This article is comparable to the Principal Purpose Test in the Multilateral Instrument.

In addition, the provisions of the Treaty will not prevent a country from the application of its domestic anti-avoidance provisions.

Mutual agreement procedure – Article 24

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

Effective date – Article 28

The Treaty will enter into force upon completion of the ratification procedures and become effective 1 April for Hong Kong and 1 January for Finland following the calendar year in which the Treaty enters into force.

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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.finnerty1@ey.com
• Kaz Parsch
  kazuyo.parsch@ey.com
• Bee-Khun Yap
  bee-khun.yap@ey.com

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ATTACHMENT

PDF version of this Tax Alert