Malaysia and Hong Kong have entered into a Double Taxation Agreement ("DTA") on 25 April 2012. The agreement will come into force once it is ratified by Malaysia and Hong Kong, respectively.
Key Features of the DTA
As with all double tax agreements, the main objectives of the DTA include the reduction in withholding tax rates and the avoidance of double taxation by allocating the taxing rights between the two countries.
Reduction in Withholding Tax Rates
The DTA provides for reduced rates of withholding tax in relation to payments arising in one state and paid to the beneficial owner of the income resident in the other contracting state.
We have set out in the table below the reduced withholding tax rates afforded under the DTA together with the withholding tax rates which would otherwise apply respectively in Malaysia and Hong Kong in the absence of the DTA. In practice, it is Hong Kong lenders and licensors of intellectual property who will benefit from reduced withholding taxes in Malaysia. The DTA confers no withholding tax concessions on Malaysians in the reverse situation.
Click here to view table.
Elimination of Double Taxation
Prior to the DTA, the profits of a Malaysian company carrying on business in Hong Kong through a permanent establishment in Hong Kong could be taxed in both countries. Under the DTA, double taxation is now avoided by allowing any Hong Kong tax paid by the company to be treated as credit against the tax payable in Malaysia in respect of the relevant income. Similarly, any Malaysian tax paid by a Hong Kong company can be treated as a credit against tax payable in Hong Kong. In practice, because both countries only tax locally sourced income, it would be an unusual situation where a tax credit would arise.
Mutual Agreement Procedures
In the event of doubt or difficulties arising for the application or interpretation of the DTA, the competent authorities shall make efforts to resolve the issues by mutual agreement. In addition, they may also hold consultations for the elimination of double taxation in cases not covered under the DTA.
Exchange of Information
The DTA incorporates the most recent Organisation for Economic Co-operation and Development ("OECD") standards relating to the exchange of information. For the purposes of preventing tax evasion, the competent authorities are required, upon request, to provide information to facilitate the administration and enforcement of local laws in Malaysia and Hong Kong.
The DTA offers benefits in limited situations only. The principal benefit could be the fact that a person from one of the jurisdictions will be taxed on business profits arising from the other jurisdiction only if it has a permanent establishment in that jurisdiction. Hong Kong lenders will benefit from reduced withholding rates on interest received from Malaysian borrowers. Likewise, the withholding rate on royalties and technical service fees paid out of Malaysia will be reduced.