Double tax treaties bring benefits
DOUBLE TAX TREATIES between Hong Kong and Belgium and revised double tax treaties between Hong Kong and the mainland could provide financial benefits for companies operating in each of the jurisdictions.
Double taxation situations arise when two or more taxes may need to be paid for the same asset or financial transaction due to an overlap between different countries' tax laws and jurisdictions. The liability is often mitigated by 'tax treaties' between countries.
Olivier Willez, a lawyer and tax expert with Belgian law firm Loyens Advocaten-Avocats, said the new Hong Kong/mainland double taxation arrangement further positioned Hong Kong as the regional gateway for foreign investments into the mainland.
The potential tax benefits offered by this arrangement will especially promote Hong Kong as a tax-efficient lending base and an intellectual property holding jurisdiction. Combined with the tax arrangement between Belgium and Hong Kong, this new arrangement could encourage more Belgian investors to route their investments into China through Hong Kong.
Mr Willez said as a result of this new arrangement, cross-border financing arrangements and transfer of technical know-how and patents between Hong Kong and the mainland would be enhanced. Cross-border restructuring through Hong Kong would also be facilitated.
He said international and Belgian investors should now evaluate whether and how they could directly benefit from this new arrangement.
The arrangement is based on the Organisation for Economic Co-operation and Development model, and has a wider scope than the previous one. The new arrangement now covers passive income such as interest payments, dividends, royalties and capital gains, and includes a provision on exchange of information.
In accordance with global standards, the new arrangement includes an agreement on the exchange of information between Hong Kong and the mainland. But the information to be exchanged is limited to that which is necessary for carrying out the provisions of the domestic laws concerning taxes covered by the new arrangement to ensure that the use of taxpayer information is not abused.
Belgium has built up an extensive network of treaties with more than 80 countries to avoid double taxation. In 2003, Belgium became the first European Union (EU) member state to agree to a tax treaty with Hong Kong. As a result of recent tax reforms, Belgium is the only EU country to permit a tax deduction on risk capital, known as a (deemed) Notional Interest.
Belgium has also extended its role as the major holding country in the EU by enabling any Asian company with a holding company set up in Belgium to benefit from not having to pay withholding tax. The treaty allows withholding tax free dividend repatriation from Belgium to Hong Kong, while in Belgium 95 per cent of dividend income from EU subsidiaries is tax-exempt.
Another Belgian tax expert said the new tax treaty led to substantial tax advantages for companies in Hong Kong which were investing, or were planning to invest, in Europe through the use of Belgian (holding) companies. In this respect, Belgian companies would be able to pay dividends, interest and royalties, under certain conditions, to Hong Kong at a zero or low rate of withholding tax.
'Besides the favourable provisions of this new tax treaty, one should also take into account the fact that Belgium has a favourable holding company regime.'
