On November 11, 2012, the Government of Canada signed a double tax treaty with the Government of the Hong Kong Special Administrative Region of the People’s Republic of China. This long-awaited treaty represents a welcome development that should facilitate trade and investment, particularly from Hong Kong into Canada. The treaty may present new opportunities for structuring some investments by Chinese enterprises into Canada.
The key provisions of the new treaty may be summarized as follows:
- Dividend withholding tax rate of 5% (for dividends paid to a company that controls directly or indirectly at least 10% of the voting power in the company paying the dividends) or 15% in all other cases.
- Interest withholding tax rate of 10% (applies only to related party interest; arm’s-length interest is generally exempt under Canadian domestic law).
- Royalty withholding tax rate of 10%; unlike many other treaties, there is no exemption for patent or know-how royalties.
- Standard capital gains article that permits source state to tax gains derived by a resident of the other state from a sale of shares deriving more than 50% of their value directly or indirectly from immoveable property situated in the source state; not as favourable as some European treaties, which exempt real property “used in a business”. These European treaties, such as the Netherlands treaty, may be preferable for certain investments in Canadian mining companies.
- There is a specific anti-avoidance rule under which treaty-reduced rates for dividends, interest or royalties may be denied in circumstances where a structure has, as one of its main purposes, the obtaining of treaty benefits. This targeted “anti-treaty shopping” provision parallels similar provisions in recently signed treaties with New Zealand, Poland and Colombia. However, this type of rule is not found in most other treaties. Careful consideration of the impact, if any, of this rule will be required in any case where these treaty benefits are sought. In the case of a Chinese investment into Canada made through an intermediate Hong Kong resident company, the potential effects of this rule will require particularly close consideration.
- The treaty includes an “Exchange of Information” article. Notably, in a protocol signed at the same time as the treaty, the contracting states agreed that this provision does not require the parties to exchange information on an automatic or a spontaneous basis, and that information exchanged between the states must not be disclosed to any third jurisdiction for any purpose.
The treaty will enter into force following its ratification by both contracting states.
For withholding taxes, the treaty will apply to amounts paid or credited to non-residents on or after January 1 in the calendar year following ratification, and in respect of other Canadian taxes for taxation years beginning on or after January 1 in the calendar year following that in which the treaty is ratified.