On November 11, 2012, Canada and the Hong Kong Special
Administrative Region of the People's Republic of China (Hong
Kong) signed a new tax treaty (the Treaty) and related
The Treaty aims to remove tax barriers to encourage trade and
investment between Canada and Hong Kong. In particular, it
reduce the rates of withholding tax applicable to certain
cross-border payments; and
ensure that double taxation does not arise for individuals and
companies doing business or earning income in the other
As expected, the Treaty also contains an exchange of information
article. The Treaty will enter into force once ratified by Canada
and Hong Kong.
The Treaty is based on the Model Tax Convention on Income and on
Capital developed by the Organisation for Economic Co-operation and
Development. Its signing occurred relatively quickly, considering
that negotiations began only in mid-2011.
The reduced withholding tax rates on certain cross-border
payments are outlined below.
5%1 or 15%
0%2 or 10%
1. The 5% rate applies when the beneficial owner of the
dividends is a company (other than a partnership) that directly or
indirectly controls at least 10% of the voting power of the paying
company. The 15% rate applies in all other cases.
2. The 0% rate applies on interest paid to:
various government bodies; and
a resident of the other country if the beneficial owner of the
interest is a resident of the other country and is dealing at
arm's length with the payer.
The 10% rate applies in all other cases when the beneficial
owner of the interest is a resident of the other country.
PwC observations: The Treaty
provides attractive reduced withholding tax rates in line with most
of Canada's other treaties. With respect to dividends, the 5%
rate is half of the withholding tax rate available under the
current Canada-China (P.R.C.) Tax Treaty. Moreover, under Article
10(2)(a) of the Treaty, the 5% withholding tax rate on dividends
extends to cases when the beneficial owner of the dividends is a
company controlling directly or indirectly at least 10% of the
voting power in the company paying the dividends. However, an
anti-avoidance clause has been added to each of the
"Royalties" articles to deny treaty benefits if one of
the main purposes of certain transactions surrounding the payment
is to obtain these treaty benefits.
Entry into force
If ratified before December 31, 2012, the Treaty will apply:
In Hong Kong: For any year of assessment
beginning on or after April 1, 2013, in respect of Hong Kong
Special Administrative Region tax.
On or after January 1, 2013, in respect of tax withheld at
source on amounts paid or credited to non-residents.
For taxation years beginning on or after January 1, 2013, in
respect of other Canadian tax.
To shipping, air transport and capital gains:
Article 8 (Shipping and Air Transport) and paragraph 3 of Article
13 (Capital Gains) will be effective from the date the Treaty
enters into force.
PwC observations: The Treaty is a
welcome addition to Canada's treaty network. Canadian corporate
taxpayers have been waiting for some time for Canada to enter into
a tax treaty with Hong Kong so that Hong Kong can be considered a
"designated treaty country" for purposes of Canada's
foreign affiliate rules. Active business earnings of a foreign
affiliate resident in a designated treaty country can qualify as
exempt earnings and be repatriated back to Canada taxfree. For
purposes of these rules, once the Treaty enters into force, it will
be deemed to have entered into force for the 2012 fiscal year (the
year of signing).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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