Comprehensive Double Taxation Agreements concluded by Hong Kong
Tax treaty between two countries allows a declarant to avoid double taxation by the simultaneous application of the tax legislation of both the country of origin and the host country. There are various tax treaties between Hong Kong and Austria, Belgium, Brunei, Canada, China, France, the Czech Republic, the island of Guernsey, Hungary, Indonesia, Ireland, Italy, Japan, Jersey Island, Kuwait, Liechtenstein, Luxembourg, Malaysia, Malta, Mexico, the Netherlands, New Zealand , Portugal, South Africa, Spain, Switzerland, Thailand, the United Kingdom, and Vietnam.
The updated list is on https://www.ird.gov.hk/eng/tax/dta_inc.htm.
Understanding a tax treaty
An international tax treaty is a treaty binding two states on all or part of their fiscal relations.
International tax treaties prevent the taxpayer from being taxed twice because of the simultaneous application of the tax laws of both states.
Each international tax treaty concluded between two states concerns:
- individuals (income tax, inheritance tax, etc.) and legal entities,
- and a period of application, with retroactive effect when the income for which it applies is from years prior to its effective date.
Each agreement provides, in particular:
- the distribution of the right to tax,
- and the arrangements for avoiding double taxation.
1. Concept of Residence
The country of tax residence of the taxpayer, natural person, allows, in principle, to know the applicable tax rules. It is determined according to certain criteria, in order of priority:
- permanent home,
- center of vital interests (personal and economic links),
- usual place of residence,
- nationality, etc.
2. Distribution of the Right to Tax
International tax treaties usually provide for three categories of tax for each category of income:
- exclusive taxation in the State of residence (capital gains on securities, for example, with some exceptions),
- exclusive taxation in the State of source (public remuneration, for example, with some exceptions),
- non-exclusive taxation in the source State (eg real estate income and capital gains).
Methods to Avoid Double Taxation
There are two methods of preventing income from being imposed a second time in the taxpayer’s state of residence: the exemption method and the imputation method.
- The exemption method has two variants:
- The total exemption, which is to disregard the income that has been imposed,
- The exemption with progressive (or “effective rate method”), the amount of income already taxed being taken into account to determine the rate of the tax to be applied to other income.
- The imputation method also has two variants:
- Total imputation, consisting of calculating the tax on the total amount of income that has been taxed, regardless of its source, and then deducting the tax paid in the other state,
- Ordinary (most used) deduction, which consists of deducting tax already paid within the limit of the tax of the state of residence relating to income taxed abroad (application of a tax credit ).
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