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published on www.hg.org  

The Hong Kong – Russia double tax agreement signed

Hong Kong and Russia have entered into a Comprehensive Double Tax Agreement (“CDTA”) on Jan 18, 2016. This is the 34th CDTA that Hong Kong has signed with its trading partners. The CDTA sets out clearly the allocation of taxing rights between the two jurisdictions and thus will help investors better assess their potential tax liabilities from cross-border economic activities.

The five milestones achieved by the Hong Kong – Russia CDTA

The five milestones achieved by the Hong Kong – Russia CDTA are outlined in the table below.

1

Hong Kong Government believes that the Hong Kong-Russia CDTA will bolster the economic and trade connections between the two places. It will also offer added incentives for companies in Russia to do business or invest in Hong Kong, and vice versa. On the other hand, it also signifies Hong Kong Government's ongoing efforts to expand its CDTA network, in particular with economies along the Belt and Road countries.

2

In the old days without a CDTA, the profits of Hong Kong companies doing business through a permanent establishment in Russia may be taxed in both places if the income is sourced in Hong Kong. Under the agreement, double taxation will be avoided in that any Russian tax paid by the companies will be allowed as a credit against the tax payable in Hong Kong in respect of the income, subject to the provisions of Hong Kong tax laws.

3

In the absence of a CDTA, income earned by Russian residents in Hong Kong is subject to both Hong Kong and Russian tax. Under the agreement, tax paid in Hong Kong will be allowed as a credit against the tax payable on the same income in Russia.  

4

Under the agreement, Russia's withholding tax rate on royalties, currently at 20% (in the case of companies) or 30% (in the case of individuals), will be capped at 3%. Russia's dividend withholding tax rate on Hong Kong residents will be reduced from the current rate of 15% to 5% or 10%, depending on the percentage of their shareholdings.

5

In addition to the above, the agreement has also incorporated an article on exchange of information (EOI), which enables Hong Kong to fulfil its international obligations on enhancing tax transparency and combating tax evasion.

Case example: the potential tax benefits for Russian making investments in China via Hong Kong

Enjoying largest benefit – using a Hong Kong company as stepping stone

Background

  1. Mr. B is from Russia with Russian company “RU OOO”;
  2. Business nature is about IT products;
  3. His business activities with China include:
      • invests in China to setup a Wholly Owned Foreign Enterprise (“WOFE”);
      • lends shareholder loans to the WOFE for business operation in China;
      • sub-licenses its intellectual property to the WOFE for business operation in China.

New arrangement

  1. Mr. B forms a Hong Kong company “HKG Ltd”;
  2. Using HKG Ltd as investor in China to setup the WOFE;
  3. Using HKG Ltd to lend shareholder loans for the WOFE’s business in China;
  4. Using HKG Ltd to own the intellectual property for the WOFE’s business in China.

Tax benefits

1. Dividends from WOFE

    • when China company earns profit and needs to pay out dividends to shareholder, withholding tax in China applies;
    • if paying to Russia OOO, the rate is 10%;
    • if paying to HKG Ltd, the rate is 5%;
    • 5% of tax benefits achieved when repatriating dividends to Hong Kong.

2. Interests from WOFE

    • when back-to-back shareholder loan involved and China company needs to pay out interest to shareholder lender, withholding tax in China applies;
    • if paying to Russia OOO, the rate is 10%;
    • if paying to HKG Ltd, the rate is 7%;
    • 3% of tax benefits achieved when repatriating interests to Hong Kong.

3. Royalties from WOFE

    • when back-to-back sub-licensing of intellectual property involved and China company needs to pay out royalties to sub-licensor, withholding tax in China applies;
    • if paying to Russia OOO, the rate is 10%;
    • if paying to HKG Ltd, the rate is 7%;
    • 3% of tax benefits achieved when repatriating royalties to Hong Kong.

Note: By virtue of Hong Kong tax laws, when Hong Kong company needs to further repatriate dividends, interests or royalties to Russia, there will be no withholding taxes for all the abovementioned payments.

Figure 1: The tax efficient investment structure for Russian investing in China via Hong Kong

Conversely, the newly signed Hong Kong – Russia CDTA also provides tax benefits to Chinese investors who want to make outbound investments in Russia via Hong Kong.  The main tax benefits are given by the situation when the Hong Kong intermediate holding company acts as the money lender and intellectual property owner for the operation of Russian subsidiary.  A 5% and 3% tax benefits in terms of withholding taxes can be derived for interests and royalties repatriation respectively when those payments are made from a Russian subsidiary back to China via Hong Kong.

Conclusion

The current status of signed CDTA is that, it will come into force after the completion of ratification procedures on both jurisdictions. In the case of Hong Kong, the agreement is implemented by way of an order to be made by the Chief Executive in Council under the Inland Revenue Ordinance, in which the order is subject to negative vetting by the Legislative Council. The Hong Kong Government to enhance Hong Kong’s position as an attractive and efficient international financial centre by maintaining its simple tax system and taking positive steps in expanding its double tax agreement network with trading partners.  It is suggested that investors from Russia as well as other countries can make use of Hong Kong as an ideal platform for doing business and making investment into China and other Belt and Road economies.

CONTACT US

Masson de Morfontaine is an international tax and business advisory services firm based in Hong Kong specializes in providing comprehensive professional services for worldwide clients.  We are experts helping our clients with practical tax and business advices and keen on advising transfer pricing issues and double tax treaty applications.  We are more than welcome to discuss with you about our services.  Please call or email us should you require more information.

 

Catherine LE BOURGEOIS
Main Partner  
+852.3593.4880
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  Wilson YEUNG
International Tax Director
+852.3593.4804
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Disclaimer: This article is issued for information purpose only and it should not be viewed as a professional advice. Accordingly, you should not act solely on the basis of the material contained in this article. We recommend that formal advice be sought before acting in any of the areas.

2016 Masson de Morfontaine Limited.  All rights reserved.

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