On 22 March 2010, the Secretary for Financial Services and the Treasury of Hong Kong, Professor K. C. Chan, and the Minister of Finance of the Netherlands, Mr J.C. de Jager, signed an agreement for avoidance of double taxation (DTA) between the Hong Kong Special Administrative Region and the Kingdom of the Netherlands.
The DTA applies to taxes on income and intends to avoid double taxation as well as to prevent tax evasion. For Hong Kong this DTA is the first tax treaty it concludes with an OECD member country adopting the latest international standard on exchange of information.
Both parties underlined that the signing of the DTA will contribute to the expansion of mutual investments and the strengthening of the economic relations between the Netherlands and Hong Kong.
Mr De Jager: “I am very happy that we have signed this agreement today. It is a milestone in the bilateral relations between Hong Kong and the Netherlands and a stepping stone towards further increasing mutual investments.”
Professor Chan: “I am confident that the Agreement will encourage greater flow of investment, technology, talents and expertise between us for the mutual benefits of both economies.”
The DTA to a large extent follows the OECD model treaty. The most noticeable features of the DTA are highlighted below.
In case a company by reason of the provisions of the DTA is resident in both States, the authorities of both States shall settle the question of residency for treaty purposes by mutual agreement. In absence of such an agreement, the company is not entitled to treaty benefits (other than the non-discrimination and mutual agreement clauses of the DTA)1.
A withholding tax rate of 0% (instead of the 15% rate currently applicable in the Netherlands) applies to dividends received by qualifying companies holding at least 10% of the share capital of the paying company. In order to qualify for the 0% regime, (i) the shares of the company receiving the dividend must be regularly traded on a recognised stock exchange (direct stock exchange test), or (ii) at least 50 percent of the shares of the company receiving the dividends is owned by a company the shares of which are regularly traded on a recognised stock exchange (indirect stock exchange test)2 .
In addition, dividends received by banks and insurance companies, pension funds, headquarters companies and the (entities created by) contracting states themselves will also benefit from the 0% withholding tax rate. To all other dividends, a withholding tax rate of 10% will apply.
No source taxation will apply to interest payments, as there is no withholding tax for such payments in either the Netherlands or Hong Kong. For royalties, Hong Kong has agreed to limit its withholding tax to 3%. The Netherlands does not levy any tax on royalty payments.
As is common practice in tax treaties based on the OECD model treaty, the DTA contains a clause on associated enterprises. If these enterprises do not conduct their business on arm’s length terms and conditions, either country is allowed to make profit adjustments which may be taxed accordingly. Other than the OECD standard, the DTA seems to contain a relaxation to the above arm’s length principle; cost sharing agreements or general service agreements, for or based on the allocation of executive, general administrative, technical and commercial expenses, R&D expenses and the like, do in itself not trigger the right to make profit adjustments.
Capital gains relating to immovable property
In line with OECD standards, gains realised on the alienation of immovable property may be taxed in the State were the immovable property is located. In addition, gains realised on the alienation of shares in company deriving more than 50 per cent of its asset value directly or indirectly from immovable property situated in the other State may be taxed in that other State, provided that shareholder holds, directly or indirectly, a minimum of 5 per cent of the issued shares.
The other State has no right of taxation if (i) the shares listed on a recognised stock exchange, (ii) the shares are alienated or exchanged in the framework of a reorganisation/ merger or similar operation, or (iii) it concerns shares in a company deriving more than 50 per cent of its asset value directly or indirectly from immovable property in which it carries on its business.
Offshore activities (exploration or exploitation of the seabed and its subsoil and their natural resources) carried out by a company of one of the States in the other State qualify as a permanent establishment in that other State unless the activities are limited to a period of in aggregate less than 30 days in a twelve month period. Towing or anchor handling, transport of supplies or personnel by ships or aircraft in international traffic are explicitly excluded from the definition of “offshore activities”.
Exchange of information
The DTA contains a provision on exchange of information relating to tax matters, according to the OECD standard. It offers an opportunity for the tax authorities of Hong Kong and the Netherlands to consult each other in order to resolve disputes on the application or interpretation of the DTA. Furthermore, under the DTA, taxpayers could request for mutual agreement procedure (and ultimately arbitration) in case actions of one or both the countries result in taxation not in accordance with this DTA.
A specific anti-abuse provision has been included in the DTA, stating that nothing in the agreement shall prejudice the right of each State to apply its domestic laws and measures concerning tax avoidance, whether or not described as such. For the Netherlands reference is made to non-resident taxation based on the substantial shareholding (aanmerkelijk belang) rules laid down in the Dutch corporate income tax act.
The DTA needs to be ratified in the Netherlands and Hong Kong before it can enter into force.
It is envisaged that the new tax treaty will enter into force as of 1 January 2011 in the Netherlands and as of 1 April 2011 in Hong Kong.