Hong Kong: Double Taxation Agreement signed with Russia
Earlier this week Hong Kong signed a Comprehensive Double Taxation Agreement (‘DTA’) with Russia. The DTA is intended to confirm the allocation of taxing rights between the two trading partners and enable businesses and investors to assess the incidence of taxation on their cross-border transactions.
Until now Hong Kong companies conducting business through a permanent establishment in Russia faced the risk of being taxed in both jurisdictions if the income was sourced in Hong Kong. With the advent of the DTA, this should no longer be the case. The DTA provides that any tax paid in Russia will be allowed as a tax credit against income in Hong Kong, subject to the usual provisions of Hong Kong tax law.
It was also the case that for individuals, notably Russian nationals resident in Hong Kong, would have their Hong Kong source income taxed both in Hong Kong and Russia. From now on, under the DTA a Russian individual who pays Hong Kong tax on Hong Kong income will be entitled to claim a tax credit on that income in Russia.
Other changes include a significant reduction to Russia’s withholding tax on dividends paid to Hong Kong residents from 15% to, under the DTA, 5% or 10% depending on the extent of their shareholdings. Furthermore, the withholding tax on royalties paid from Russia to Hong Kong residents will be capped at 3% under the DTA, a reduction to the pre-DTA level for individuals and companies of 30% and 20% respectively.
In common with other DTA’s the treaty provides for the mutual exchange of information between the two jurisdictions to increase tax transparency in the interests of combatting tax evasion.
There remains the ratification of the DTA in accordance with the domestic law of each state and it is expected that this will be completed later this year.
It is widely anticipated that the DTA will boost the already strong economic links and trade transactions between the two jurisdictions and will develop new trade and investment opportunities from the additional certainty of tax liabilities. The execution of this DTA brings the total number of treaties signed by Hong Kong to 34.