Hong Kong Secretary for Financial Services and the Treasury Professor K C Chan, and Consul-General of Japan in Hong Kong, Yuji Kumamaru, signed, on 9 November 2010, the text of the much anticipated Hong Kong/Japan treaty on the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.
Under the treaty, double taxation will be avoided in that any Japanese 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 dividends from Japan not attributable to a permanent establishment in Japan are subject to a Japanese withholding tax, which is currently set at 20%. Under the agreement, such withholding tax is capped at 5% for a company holding (directly or indirectly) for a period of six months at least 10% of the voting shares of the company paying the dividends, and 10% for other cases.
Also, Hong Kong residents receiving royalties from Japan are subject to a current withholding tax at 20% in Japan. Under the agreement, the royalties withholding tax will be capped at 5%. The Japanese interest withholding tax on Hong Kong residents will be reduced from the current rate of 20% to 10%.
The treaty incorporates the latest OECD standards on exchange of information but unusually it does not include a limitation of benefits (LOB) clause similar to the comprehensive LOB Clauses which are based on a series of objective tests that have to be met to claim treaty benefits that have been included in Japan's most recently renegotiated tax treaties.
Rather, at article 26 the treaty includes a very brief clause headed "Limitation of Relief" that lists five specific paragraphs in the treaty and states that: " ... No relief shall be available under (the five paragraphs) if the main purpose of any person concerned with the creation or assignment of any right or property in respect of which income arises was to take advantage of the such provisions ..."
The new treaty will come into force after the completion of ratification procedures on both sides. It was the sixteenth comprehensive double tax treaty concluded by Hong Kong with its trading partners, coming after those with Belgium, Thailand, the Mainland of China, Luxembourg, Vietnam, Brunei, the Netherlands, Indonesia, Hungary, Kuwait, Austria, the UK, Ireland, Liechtenstein and France.
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