On 19 March 2018, Hong Kong and India signed a tax treaty for the avoidance of double taxation. The agreement sets out the allocation of taxing rights between the two jurisdictions and will help investors better assess their potential tax liabilities from cross-border economic activities.
Under the comprehensive agreement for the avoidance of double taxation (CDTA), double taxation will be avoided in that any Indian tax paid by Hong Kong companies will be allowed as a credit against the tax payable in Hong Kong on the same profits, subject to the provisions of the tax laws of Hong Kong. Likewise, for Indian companies, the tax paid in Hong Kong will be allowed as a deduction from the tax payable on the same income in India. The Treaty contains some treaty-based BEPS recommendations from Action 6 (preventing the granting of treaty benefits inappropriate circumstances) and Action 14 (making dispute resolution mechanisms more effective). The Treaty also contains a corresponding adjustment provision and a saving clause, confirming that the provisions of the Treaty in no case prevent a Contracting State from the application of the provisions of its domestic law and measures concerning tax avoidance or evasion.
The agreement provides the following tax relief arrangements;
- India’s withholding tax rate for Hong Kong residents on interest (currently at 20 per cent in general) will be capped at 10 per cent;
- Hong Kong airlines operating flights to India will be taxed at Hong Kong’s corporation tax rate, and will not be taxed in India; and
- Profits from international shipping transport earned by Hong Kong residents arising in India and subject to tax there will enjoy 50 per cent reduction in tax in India.
The Hong Kong-India CDTA has also incorporated an article on exchange of information, which enables Hong Kong to fulfil its international obligations on enhancing tax transparency and combating tax evasion. The CDTA will come into force after the completion of ratification procedures by both sides.
