May 2010 - Association of Dutch Businessmen

know your tax
Focus on Hong Kong
Text Pieter de Ridder and Nicolien Luijsterburg of Loyens & Loeff
Hong Kong is well-known for its low tax rates (for
businesses: 16.5%) and its favorable off-shore tax regime
which, over the years, attracted many companies to start
up business in Hong Kong. Coupled with the fact that
Hong Kong does not tax foreign dividends and capital
gains and does not levy a withholding tax on dividend
payments, Hong Kong could be a suitable jurisdiction for
a host of tax planning opportunities (holding company,
trading operations, service centre). In practice however,
besides for tax planning purposes vis a vis the Mainland
of China, Hong Kong has not yet often been used as a
location for holding companies because it has only a very
limited number of tax treaties for the avoidance of double
taxation. Currently, Hong Kong has tax treaties in effect
with China, Belgium, Luxembourg, Thailand and Vietnam.
For all the other countries in the world, withholding taxes
are not reduced. In contrast, other well-known holding
jurisdictions like the Netherlands, Luxembourg and
Singapore have concluded many tax treaties that limit the
taxing rights of the jurisdictions in which the subsidiaries
are located.
The above is about to change as recent developments
show that Hong Kong is very much focused on the
expansion of its tax treaty network. During the last two
months, Hong Kong concluded 3 new tax treaties (with the
Netherlands, Brunei and Indonesia) and is negotiating with
several more countries. The expansion of Hong Kong’s tax
treaty network is the result of the OECD report issued in
April 2009 on the progress by financial centers around the
world towards implementation of an internationally agreed
standard on exchange of information for tax purposes.
Since then, Hong Kong has implemented legislation
committing it to an active exchange of information in
certain situations. Hong Kong’s tax treaties with Indonesia
and the Netherlands present interesting tax planning
opportunities.
Hong Kong’s tax treaty with Indonesia reduces the
Indonesian dividend withholding tax rate from 20%
to 5% for interests of 25% or more in an Indonesian
company. This is the lowest rate possible under Indonesia’s
current tax treaty network. The same applies to royalty
withholding tax which is also reduced to 5%. The sale
of shares in an Indonesian company by a Hong Kong
shareholder will be exempt from Indonesian capital gains
tax under the treaty, unless the Indonesian company
would be a real property owning company as defined in
the treaty. Indonesian interest withholding tax is reduced
to 10%, which is comparable to Indonesia’s tax treaties
with Singapore and the Netherlands. Because of Hong
Kong’s domestic tax restrictions with respect to interest
deductions however, we doubt whether Hong Kong will be
used widely for financing Indonesian groups or borrowers.
However, as a jurisdiction for holding investments in
Indonesian companies, Hong Kong may become an
interesting choice. Care should be taken however, that
Indonesia recently issued tax circulars which significantly
reduce the ability to enjoy tax treaty benefits under
Indonesia’s tax treaties, unless the tax treaty country
satisfies the pertinent substance requirements prescribed
by the circulars. Given Hong Kong’s territorial tax system,
which distinguishes offshore source and onshore source
income, with offshore sourced income not being taxable
in Hong Kong, the question arises whether dividends paid
by an Indonesian company to a Hong Kong shareholder
will be eligible for the reduced withholding tax rate under
Indonesia’s tax treaty with Hong Kong. Based on the tax
circulars alluded to above, this may be in jeopardy because
of the fact that the dividends are tax exempt in Hong Kong.
This is a question, amongst many others, which still needs
to be clarified.
Hong Kong’s treaty with the Netherlands provides
for an exemption of Dutch dividend withholding under
certain circumstances. Among others, if the Hong Kong
company would be a listed company, a business centre
for the group to which the Dutch company belongs or if
the tax authorities would issue a statement that the Hong
Kong company has not been established to avoid Dutch
taxes. This could make Hong Kong an interesting holding
company location to hold the shares of Dutch companies.
It should also be noted that the treaty explicitly reserves
the right to both jurisdictions to apply their domestic anti
abuse provisions. Thus, it is possible that the Netherlands
may invoke its anti abuse provisions if they believe that the
treaty situation is created to avoid Dutch taxes.
Although the treaties recently concluded by Hong Kong
still need to be ratified by all countries concerned, which
may sometimes take a while, the treaties themselves
stipulate that they shall take effect as from 1 April 2011
insofar as Hong Kong taxes are concerned, and 1 January
2011 with respect to Dutch and Indonesian taxes. In
conclusion, with the recently concluded tax treaties, Hong
Kong is moving up the ladder of interesting choices for
tax planning purposes, but one should take care in acting
wisely when considering all the ins and outs of using Hong
Kong. You should consult your tax adviser to get a good
understanding of the relevant considerations.
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