Treaty on tax good news for French

PUBLISHED : Saturday, 17 December, 2011, 12:00am
UPDATED : Saturday, 17 December, 2011, 12:00am


Good news for Hong Kong's French community: a treaty to eliminate double taxation between the two places takes effect next year.

It means French residents of Hong Kong who have deep ties in both places will no longer face the possibility of having their income taxed twice, with clear guidelines defining which of the two jurisdictions someone needs to pay tax in.

'In the absence of a double taxation agreement, there's a lot of case law that will in certain situations make it possible to pay taxes in France even though you work here the whole year,' said Eric Mayer, managing partner of Thomas, Mayer and Associes, a law firm with offices in Paris and Hong Kong. 'You're an expat, you come to Hong Kong to live here with your family, but you still have your home in Paris - that could give rise to arguments from the French authorities to say you're still a tax resident in France.'

Salaries tax for the highest income bracket is 41 per cent in France, while in Hong Kong the highest marginal rate is 17 per cent.

The withholding tax on passive income - dividends, interest and royalties - from their investments in France will be reduced to 10 per cent for Hong Kong residents. Those taxes used to add up to 33 per cent on royalties, 25 per cent on dividends and 18 per cent on interest income.

The treaty will apply from the beginning of the next financial year for each jurisdiction: January 1 in France and April 1 in Hong Kong. Double-taxation agreements with Austria, Hungary, Ireland, Japan, Liechtenstein, the Netherlands and New Zealand also take effect next year.

Hong Kong had already adopted the territorial principle of taxation, meaning only income sourced from the territory is taxed. Therefore, Hong Kong residents in France - where 70 Hong Kong-owned companies operate - usually did not have to pay tax on their Hong Kong assets.

An agreement has been in the works since 2003 but was stalled first by Hong Kong's laws, which did not endorse the Organisation for Economic Co-operation and Development's exchange-of-information principles until 2005; the Legislative Council enacted amendments last year. Then the European debt crisis forced Inernational Monetary Fund managing director Christine Lagarde to call off a trip to Hong Kong in May last year to sign the agreement. Financial Secretary John Tsang Chun-wah and Lagarde finally put pen to paper last October in Paris, and both sides had ratified the treaty by last month.

The French community stands at around 15,000 and is growing at 10 per cent annually, according to the consulate. Meanwhile, Hong Kong has the second-biggest trade surplus with France in the world - Euro3.8 billion (HK$38.45 billion) last year - figures from the consulate show.