Hong Kong has signed a comprehensive agreement for the avoidance of double taxation (CDTA) with Latvia on 13th April, 2016. This is the 35th CDTA that Hong Kong has signed with its trading partners and it signifies Hong Kong's ongoing efforts to expand its CDTA network, in particular with economies along the Belt and Road. The Hong Kong Government emphasized that the CDTA sets out clearly the allocation of taxing rights between the two jurisdictions and therefore will help investors better assess their potential tax liabilities from cross-border economic activities. Furthermore, the agreement will bolster the economic and trade connections between the two places. It will also provide added incentives for companies in Latvia to do business or invest in Hong Kong, and vice versa.
During the old days, in the absence of a CDTA, the profits of Hong Kong companies doing business through a permanent establishment in Latvia may be taxed in both places if the income is Hong Kong sourced. Under the agreement, double taxation will be avoided in that any Latvian tax paid by the companies will be allowed as a credit against the tax payable in Hong Kong on the same profits, subject to the provisions of the tax laws of Hong Kong. Besides, in the absence of a CDTA, income earned by Latvian residents in Hong Kong is subject to both Hong Kong and Latvian tax. Under the agreement, tax paid in Hong Kong will be allowed as a credit against the tax payable on the same income in Latvia.
Regarding withholding taxes, under the CDTA, Latvia's withholding tax rate on royalties (currently at various rates and can be as high as 23% in some cases) will be reduced to 0% for companies and capped at 3% in all other cases. Latvia's withholding tax rate on dividends and interest (currently at various rates and can be as high as 30% in some cases) will also be reduced to 0% for companies and capped at 10% in all other cases.
In addition to the above, the Hong Kong-Latvia CDTA 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. All in all, the CDTA will come into force after the completion of ratification procedures on both sides.