On November 11, 2012, the Government of Canada and the Government of the Hong Kong Special Administrative Region of the People’s Republic of China signed a comprehensive tax treaty. This is a positive development that will facilitate business transactions between Canada and Hong Kong.
Highlights of the treaty include the following:
- Business income earned in Canada by a resident of Hong Kong will be taxed in Canada only to the extent that the income is earned through a permanent establishment in Canada. The definition of a "permanent establishment" in the treaty is similar to that in many other treaties, generally being a fixed place of business through which the business of an enterprise is carried on.
- The dividend withholding tax will be capped at 15%; however, the rate will be reduced to 5% for dividends paid to a company that controls, directly or indirectly, at least 10% of the voting power of the company paying the dividends.
- Withholding tax on interest payments will be limited to 10%. The treaty codifies Canadian domestic law by reducing the rate to 0% when the payer and recipient deal at arm's length and the beneficial owner is a resident of the non-source state.
- Withholding tax on royalties will be at the rate of 10%, and there are no exemptions for certain royalties. Canada's tax treaty with the United States, for instance, reduces the rate to 0% for certain royalties relating to copyright in respect of literary, dramatic, musical or artistic works; payments for the use of or right to use computer software; payments for the use of or right to use patents or information concerning industrial, commercial or scientific experience; and payments in respect of broadcasting.
- Capital gains derived by a resident of one state from the sale of shares deriving more than 50% of their value directly or indirectly from immovable property in the source state may be taxed by the source state. This treatment is less favourable than Canada's treaties with certain European countries, which exempt immovable property in which the business was carried on.
- The treaty includes an anti-treaty shopping provision in each of the dividend, interest and royalty articles. Each provision prevents a recipient from benefitting from the reduced rates under the treaty for an amount relating to dividends, interest or royalties, as the case may be, where one of the main purposes of any person concerned with the assignment or transfer of such an amount is to obtain benefits under the relevant article of the treaty.
- The treaty will come into force on January 1 of the year following the year in which the treaty has been ratified by both Canada and Hong Kong. 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. In respect of other Canadian taxes, the treaty will apply for taxation years beginning on or after January 1 in the calendar year following the year in which the treaty is ratified.