Double Tax Treaty between Hong Kong and The Netherlands now ratified in both countries

Wednesday, 16 November 2011 16:05

On 1 July 1997, the transfer of sovereignty regarding Hong Kong took place from the United Kingdom to the People’s Republic of China. As of that date Hong Kong became one of two special administrative regions of the People’s Republic of China. Hong Kong has sovereignty of its taxing system. The tax law of the People’s Republic of China is therefore not applicable in Hong Kong. As a result of this, the double tax treaty between the Netherlands and the People’s Republic of China was not applicable for Hong Kong since then either.

As per January 1st, 2012, a double tax treaty to avoid double taxation between the Netherlands and Hong Kong will be effective however. For Hong Kong the agreement will be effective on the 1st of April 2012. When the agreement enters into force, it will terminate the Sea Transport Agreement and the Air Transport Agreement concluded between both countries.

In general, the new agreement follows the OECD model tax convention. The maximum withholding tax rates are:
• Dividends 10%.
• Interest 0%.
• Royalties 3%

However, dividends are exempt if the dividends are for example received by:

A company owning directly at least 10% of the capital of the company paying the dividends; and
The shares of the company receiving the dividends are regularly traded on a recognized stock exchange; or
At least 50% of the shares of the company receiving the dividends is owned by a company whose shares are regularly traded on a recognized stock exchange and (i) last-mentioned company is a resident of a contracting party, or (ii) is a resident of an EU Member State if it would be entitled to similar or more favorable benefits as provided by the dividends article pursuant to a tax agreement between its state of residence and the contracting party from which the benefits of the dividends article are claimed or pursuant to a multilateral agreement to which its residence state and contracting party from which the benefits of the dividends article are claimed are a party;
A headquarter of a multinational group if it provides a substantial portion of the overall supervision and administration of the group and if it has and exercises, independent discretionary authority to carry out these functions.

A company is regarded a headquarter if:

The corporate group exists of companies resident in, and engaged in an active business in, at least 5 countries an the business activities carried on in each of the 5 countries generate at least 10% of the gross income of the group; and
Not more than 50% of its gross income is derived from the contracting party of which the company paying the dividends is a resident

The Netherlands applies the exemption-with-progression method for the avoidance of double taxation. Further, the exemption method applies to income from immovable property, Permanent Establishment income, employment income which is not only taxable in the source state and employment income derived from an employment exercised aboard a ship or aircraft operated in international traffic. The credit method applies with respect to dividends, royalties, capital gains, director fees, income of entertainers and sportsmen and pensions, government pensions and other income. Hong Kong applies the credit method to all foreign source income for the avoidance of double taxation.

Please note that the new agreement also contains some deviations from the OECD model tax convention.

For the full text in English see

https://zoek.officielebekendmakingen.nl/trb-2010-198.html

For more information you may contact Michel Bilars at Luminous Tax Matters:

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