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13 December 2022 Hong Kong and Mauritius sign comprehensive double taxation arrangement
On 7 November 2022, Hong Kong signed the CDTA with Mauritius which will become effective in Hong Kong for tax years beginning 1 April 2023 if the ratification procedures can be completed in 2022. A company is a Hong Kong tax resident if it is incorporated in Hong Kong or if incorporated outside Hong Kong, being normally managed or controlled in Hong Kong. The tie-breaker rule for dual resident companies is where its place of effective management is situated. In addition to a fixed place permanent establishment (PE), the CDTA covers other forms of PE such as Construction PE, Service PE and Agency PE. The fixed place PE includes a warehouse in relation to a person providing storage facilities for usage by others. Certain activities are listed as exempt from creating a PE such as using facilities for storage, display or maintenance of stock of the enterprise’s own goods, processing, purchasing goods or merchandise, or collecting information, and other preparatory or auxiliary activities. The anti-fragmentation rule is absent in the CDTA. Article 7 of the CDTA generally follows Article 7 of the 2021 version of the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model Treaty). However, the CDTA does not restrict deductibility of expenses payable to a head office in the form of royalties, fees, or commissions, among others. The CDTA also contains the exclusion for purchasing activity, which is not present in the UN Model Treaty or the OECD MTC. Taxation of Dividends (Article 10), Interest (Article 11), Royalties (Article 12) and Capital Gains (Article 13) Passive streams of income like dividends, interest and royalties are generally taxable in the resident jurisdiction. While currently neither Hong Kong nor Mauritius imposes withholding tax on dividends or capital gains on disposal of shares, the interest and royalty income may be taxed in the source jurisdiction at the withholding rates summarized below:
To eliminate double taxation on a person, both jurisdictions allow a foreign tax credit against its jurisdictional tax for the taxes paid in the other jurisdiction.3 An introductory statement or preamble specifying that the CDTA is intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. The principal purpose test (PPT) provisions whereby the granting of tax benefits under the CDTA 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. The PPT would not however apply where 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 CDTA.
Exempt if the nonresident does not carry on any business in Mauritius and such interest is paid by either an entity that holds a Global Business License (GBL) under the Financial Services Act (FSA) out of its foreign source income or a bank holding a banking license under the Banking Act insofar as the interest is paid out of its gross income from banking transactions with nonresidents and entities holding a GBL under the FSA. Under Hong Kong’s domestic law, the amount of tax credit is limited to the Hong Kong profits tax payable in respect of the same income. Document ID: 2022-6201 | |||||||||||||
