On 18 January 2016 Hong Kong signed a double taxation agreement (DTA) with Russia. This agreement comes shortly after Hong Kong concluded a DTA with Romania in November 2015, which is also on the 'Belt and Road' route, and brings the number of DTAs in Hong Kong to 34.
Professor Chan, Secretary for Financial Services and the Treasury within the Hong Kong government, said, 'The agreement 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.'
The DTA will come into force following ratification procedures on both sides. If these can be concluded in 2016, the DTA will be effective from 1 April 2017 in Hong Kong and 1 January 2017 in Russia.
Withholding tax relief and exchange of information
Since Hong Kong does not charge withholding tax on dividends and interest, the focus of the DTA's withholding tax provisions is to reduce withholding tax on dividends and interest received by a Hong Kong resident from a Russian entity.
The DTA reduces withholding tax on dividends from 15% to 10% in most cases. This is reduced to 5% if the beneficial owner of the dividend is a parent company with at least 15% of the capital of the distributing company. A 0% rate applies to dividends paid to the Hong Kong Monetary Authority, the Exchange Fund or any entity owned by the Hong Kong government. Withholding tax on interest is reduced from 20% to 0%, and withholding tax on royalties is reduced from 20% to 3%.
Generally, no withholding tax will be charged on capital gains from the sale of a Russian company by a Hong Kong company provided the company derives less than half of its asset value from Russian immovable property (such as real estate, agriculture and forestry).
The DTA also includes a provision for the exchange of tax information between the two jurisdictions plus any specific anti-avoidance provisions.
Tax benefits relating to business profits
The main provision relating to business profits affects Hong Kong resident entities generating profits in Russia. Under the DTA, a Hong Kong resident entity will not be subject to tax on profits in Russia unless it is operating through a permanent establishment (PE). If it is operating through a PE, only profits attributed to the PE will be taxable in Russia.
A PE in Russia includes a building site or certain similar physical projects operating for longer than 12 months and the furnishing of services through staff in Russia for longer than 183 days in any 12-month period.
Reduction of witholding tax on dividend, interest and royalties
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