Hong Kong Tax alert - Ernst & Young T Magazine

13 April 2011
Hong Kong
Tax alert
Hong Kong signs comprehensive
double tax agreement with Portugal
On 22 March 2011, Hong Kong signed a comprehensive double taxation agreement
(CDTA) with Portugal. This brought the number of CDTAs Hong Kong has
concluded with other jurisdictions to nineteen.
The CDTA with Portugal contains several favorable provisions, which are expected
to further promote investment and trading between Hong Kong and Portugal. This
alert summarizes the salient points of those provisions as applicable to Hong Kong
residents.
Business profits
► Active business profits of a Hong Kong resident enterprise will not be liable to tax
in Portugal unless they are attributable to a permanent establishment (PE)
maintained by the Hong Kong enterprise in Portugal. Where a Hong Kong
enterprise has maintained a PE in Portugal, only profits attributable to the PE
would be liable to tax in Portugal.
► The furnishing of services (for the same or a connected project) by a Hong Kong
resident enterprise directly or through employees or other personnel in Portugal
for a period or periods aggregating not more than 183 days within any 12-month
period will not render the enterprise as being considered to maintain a PE in
Portugal.
► A Hong Kong resident enterprise will not be liable to tax in Portugal if it simply
maintains a buying office in Portugal which only makes purchases for the Hong
Kong resident enterprise.
► Hong Kong resident airliners and ship owners will not be subject to tax in
Portugal in respect of profits derived from international traffic.

2
.
Exemption or reduction of tax on dividends, interest, royalties and the treatment of
capital gains on disposal of shares
The following table summarizes the applicable withholding rates for the captioned
income flows received from Portugal by a Hong Kong resident as beneficial owner.
Tax rate
Notes
Passive
income
1 The higher withholding tax rate of 21.5% applies to individual recipients.
2 A 5% rate applies if the beneficial owner of the dividends is a company (other than a partnership) holding
directly at least 10% of the capital of the dividend paying company. For other cases, the 10% rate applies.
3 A 0% rate applies if the beneficial owner of the interest is:
(a) the Hong Kong government;
(b) the Hong Kong Monetary Authority;
(c) other similar institutions wholly owned or funded by the Hong Kong government which may be
established in the future, as mutually agreed by the competent authorities of the two parties.
For other cases, a 10% rate applies.
4 Capital gains on disposal of shares derived by a Hong Kong resident investor other than those from the
alienation of shares of a company which has 50% or more of its assets comprising, directly or indirectly, of
immovable property located in Portugal would not be chargeable to tax in Portugal.
Hong Kong Tax alert
Dividends Interest Royalties Capital gains
on disposal of
shares
Normal withholding rate 21.5% 21.5% 15% / 21.5% 1 25%
Reduced rate under the
CDTA
Ponte Vasco da Gamma, Lisbon, Portugal
5%/10% 2 0% / 10% 3 5% 0% 4
There is however a specific anti-treaty shopping provision contained in the Protocol to
the CDTA governing the taxation of dividends, interest, royalties, capital gains and
other income. This provision will deny the tax benefits otherwise available if the
transactions involve conduit arrangements under which the relevant income streams
are all or substantially paid by the recipient to a third person, and the main purpose of
structuring the transactions in this manner is to take advantage of the relevant tax
benefits under the CDTA.

Effective date of the CDTA
The CDTA will only come into force in the tax year following the calendar year in
which the relevant ratification procedures are completed. Assuming that the
ratification procedures can be completed in 2011, the CDTA shall then have effect as
follows:
(a) for Hong Kong: for any year of assessment beginning on or after 1 April 2012;
(b) for Portugal: for any income year beginning on or after 1 January 2012.
Conclusion
For Hong Kong resident corporate investors holding directly at least 10% of the
capital of the dividend paying company in Portugal, the reduction under the CDTA of
the dividend withholding tax from the normal rate of 21.5% to 5% is more preferential
than that available under many of Portugal’s other CDTAs. For example, under the
China-Portugal CDTA, the rate can only be reduced to 10%. Furthermore, while
Portugal’s CDTAs with Turkey and the United States also provide for a reduced rate of
5%, in order to qualify for the reduced rate investors from those countries must have
held at least 25% of the shares of the dividend paying company continuously for a
period of at least 2 years preceding the date of payment of the dividend.
In addition, Portugal, being a member of the European Union (EU), observes and
benefits from various EU Directives under which withholding taxes on the payment of
dividends, interest and royalties etc. between group companies situated in different
EU member states is eliminated. Therefore, the CDTA with Portugal has now added
one more EU location to Hong Kong’s CDTA network (in addition to Belgium,
Luxembourg and the Netherlands etc.) through which outbound investments into
these and other EU member states can be structured.
Clients who have significant investments outside their own jurisdiction, especially
those in the EU, should consider whether it is desirable to leverage Hong Kong’s
expanding CDTA network when considering the location of their regional holding or
operational companies. In this regard clients should seek professional tax advice.
Hong Kong office
18/F, Two International, Finance Centre, 8 Finance Street, Central, Hong Kong
Tel: +852 2846 9888 / Fax: +852 2868 4432
Principal tax contact
Tracy Ho
+852 2846 9065
tracy.ho@hk.ey.com
Hong Kong Tax partners
Agnes Chan
+852 2846 9921
agnes.chan@hk.ey.com
Florence Chan
+852 2849 9228
florence.chan@hk.ey.com
Joe Chan
+852 2629 3092
joe-ch.chan@hk.ey.com
Owen Chan
+852 2629 3388
owen.chan@hk.ey.com
Chee Weng Lee
+852 2629 3803
chee-weng.lee@hk.ey.com
May Leung
+852 2629 3089
may.leung@hk.ey.com
Loretta Shuen
+852 2629 3778
loretta.shuen@hk.ey.com
Grace Tang
+852 2846 9889
grace.tang@hk.ey.com
Jo An Yee
+852 2846 9710
jo-an.yee@hk.ey.com
International Tax Services partners
Patrick Cheung
+852 2846 9905
patrick.cheung@hk.ey.com
Chris Finnerty
+852 2629 3868
chris.finnerty@hk.ey.com
Becky Lai
+852 2629 3188
becky.lai@hk.ey.com
Christian Pellone
+852 2629 3308
christian.pellone@hk.ey.com
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