legal briefing
New tax treaty stimulates business traffic Residents of Canada and Hong Kong will start enjoying tax reliefs next year.
S
een as a result of relatively fast negotiations, new tax treaty between the Government of Canada the Government of the Hong Kong Special Administrative Region of China is expected to stimulate business traffic between the two highlydeveloped entities. Tax law experts stressed that the Canada-Hong Kong tax treaty, signed on November 11, 2012, poses a critical maturity to the business relations of the parties involved. They agreed that cross-border trade and investments will increase once implementation of tax reprieves takes effect next year. The advantages of the new pact extend beyond residents of the involved parties. Non-Hong Kong businesses involving intermediaries in Hong Kong may also benefit from the tax treaty, especially those in mainland China. Lyne M. Gaulin of Miller Thomson LLP said the tax treaty intends to avoid double taxation and prevent fiscal evasion with respect to taxes on income. “Since it has been held that the Canada-China Tax Treaty does not apply to Hong Kong, there was a need for a separate tax treaty between Canada and Hong Kong,” Gaulin noted. “This positive development should promote business between Canada and Hong Kong and could also have an impact on the structuring of certain
“The treaty rate of 5% on cross-border dividends compares favorably to other tax treaties and can be beneficial for Chinese investments in Canada...” inbound investments into Canada,” he added. What are the key aspects of the treaty? Peter Botz of McMillan LLP cited the key benefits of the treaty to Canadian companies which include the ability to repatriate after-tax active business profits from Hong Kong to Canada as “exempt surplus” free of Canadian tax. On the other hand, Botz noted residents of Hong Kong will gain from the reduced withholding tax rate for cross-border dividends, interest and royalty payments. “The treaty rate of 5% on cross-border dividends compares favorably to other tax treaties and can be beneficial for Chinese investments in Canada through a Hong Kong company, or for Canadian outbound investment through a Hong Kong company,” he said. Botz added that Hong Kong residents will also 32 HONG KONG BUSINESS | JANUARY 2014
Jim Wilson
Lyne Gaulin
Peter Botz
benefit from the residency tie-breaker rules that may help international business principals who have family or business connections in both Canada and Hong Kong. Jim Wilson, of Gowling Lafleur Henderson LLP, also cited the standard dual resident tie-breaker rules for individuals, a common feature in many of Canada’s other tax treaty agreements, as one of the key aspects of the tax pact. “In light of the significant number of Hong Kong residents who have moved to Canada since the late 1980s and the number of situations where questions regarding residence exist, the inclusion of these tie-breaker rules should help dual resident individuals ascertain with a significant degree of certainty in most cases the jurisdiction in which they would be considered resident,” Wilson said. Wilson and Koh both agree that another key aspect is the provision on business profits. Under the treaty, Hong Kong residents conducting business in Canada will only be taxed on business income earned through a permanent Canadian establishment. Is this a unique new tax? According to Wilson, changes made to the Treaty terminology make it applicable only to the relevant parties. For example, Article 1 of the Treaty refers to “residents of one or both of the Parties”, as opposed to “residents of one or both of the Contracting States.” Article 4 has similar changes in terminology, where the term “national” in Article 3 of the Treaty only has a unilateral definition for Canadian nationals. “Since Hong Kong is not a sovereign state, the signing of this Treaty has led to certain departures from the more traditional language seen in Canada’s other tax treaties,” Wilson said. “Only time will tell if this provision becomes problematic for Canada. On the surface, it seems that the entitlement to treaty benefits, subject to the limitation of benefits provisions in the Treaty, is a relatively easy test to meet for Hong Kong residents.” When will the treaty come into force? According to Miller Thomson’s Gaulin, will come into force on the date of the later of the notification by Canada and Hong Kong that the Tax Treaty has been ratified in accordance with their respective domestic laws. In Canada, the Tax Treaty, he said, will apply to tax withheld at source on amounts paid or credited to non-residents on or after January 1 in the calendar year following the year in which the Tax Treaty enters into force. The Tax Treaty will generally apply to other Canadian taxes for taxation years beginning on or after January 1 in the calendar year following the year