On November 11, 2012, the Government of Canada signed a tax treaty with the Government of the Hong Kong Special Administrative Region of the People's Republic of China. This is Canada's first tax treaty with Hong Kong and is a welcome addition to Canada's treaty network given the growing social and economic ties between Hong Kong and Canada.
Key provisions of the tax treaty include the following:
- The withholding tax rate for dividends is 5% if the recipient is a company controlling directly or indirectly at least 10% of the voting power of the company paying the dividends. Otherwise the rate is 15%.
- The withholding tax rate for interest is 10%. There is a domestic Canadian withholding tax exemption for interest on arm's length debt (assuming there is no participating interest). Thus the treaty benefits related party debt.
- The withholding tax rate for royalties is 10%. The royalty concept in the treaty is broader than that in many of Canada's other tax treaties.
- There are anti-avoidance rules for dividends, interest, and royalties that apply where one of the main purposes is to obtain treaty benefits.
- Capital gains tax applies to immovable property, permanent establishment movable property, and shares, partnership interests and trust interests that derive more than 50% of their value directly or indirectly from immovable property.
- There is an exchange of information article. A protocol released with the treaty says that the parties are not required to exchange information on an "automatic or a spontaneous basis," and that information exchanged is not to be disclosed to any third jurisdiction for any purpose. The exchange of information article applies only in respect of taxable periods covered by the treaty.
The tax treaty will enter into force once it is ratified by Canada and Hong Kong. The Canadian withholding tax rate reductions apply to payments made on or after January 1 of the calendar year following ratification. The provisions regarding other Canadian tax take effect for taxation years beginning on or after such January 1. An exception to these effective dates applies in the case of the shipping and air transport and capital gains articles, which apply from the date the tax treaty enters into force.