In late February the Secretary for Financial Services and the Treasury of Hong Kong Special Administrative Region of the People's Republic of China ("Hong Kong"), Professor K C Chan and the Chief Minister of the Bailiwick of Jersey ("Jersey"), Senator Ian Gorst, signed a compensative Double Taxation Treaty ("DTA") between Hong Kong and Jersey. The DTA will become effective upon each of the governments of Hong Kong and Jersey ratifying the agreement.
This is the twenty-third DTA signed by Hong Kong and the third by Jersey and it is the first DTA that Hong Kong has signed with a leading international offshore financial centre. The DTA is based on the Organisation for Economic Co-operation and Development's (the "OECD") Model Agreement on exchange of information for tax relation matters. The DTA also sets out the allocation of taxation rights between Hong Kong and Jersey and tax relief available to both personal and corporate incomes in relation to activities such as profits, dividends, interest, royalties, salary and pension income.
The Hong Kong/Jersey Relationship
Jersey, through Jersey Finance (the promotional agency for Jersey's financial services industry), has had a presence in Hong Kong since 2009, however Jersey companies have been involved in transactions involving Hong Kong and the People's Republic of China ("China") for many years. Both Jersey and Hong Kong are seen as gateways to bigger markets, Jersey to London and by extension to the European Union and Hong Kong to China. Chinese companies have historically used Jersey as a gateway into the UK and Europe, for example, 25% of Chinese companies that have listed in London have done so through a Jersey vehicle. Further, nearly US$11 billion of banking deposits in Jersey derive from the Far East. More recently companies incorporated in Jersey have been given approval to list on the Stock Exchange of Hong Kong, with a view to expanding into China. We have also seen a development whereby Jersey incorporated companies, listed on other foreign exchanges, looking at moving their listing to Hong Kong, to tap into the Chinese investors.
The DTA will reinforce the commitment of Jersey's finance industry into building and maintaining a strong presence in Asia, especially in China, this treaty will only strengthen such a commitment.
The positive commercial and political implications flowing from the DTA to both Hong Kong and Jersey should not be discounted. The OECD Model Agreement as a legal instrument to be used to establish effective exchange of information and thereby to curb harmful tax practices. Upon ratification, it is to be expected that the DTA will deal with aspects including:
- taxes to be covered, both individual and enterprise income tax;
- exchange of information upon request and the form of such a request;
- providing for the possibility of tax examinations or investigations by competent authorities; and
- providing for the possibility of declining a request, for instance, where the request is not made in conformity with the TIEA or the requesting party has not pursued all means available in its own territory to obtain the information or where the disclosure of the information would be contrary to public policy.
The entering into the DTA will provide comfort to investors, wherever geographically they may be based, to continue to invest via Jersey vehicles. Further, due to Hong Kong's role within China as its premier financial centre, the entering into the DTA is likely to reap positive economic activity for Jersey. In addition, the fact that the third DTA (along with 28 TIEA's also signed) entered into by Jersey gives credence to Jersey's best efforts to address harmful tax practices. As noted above, the DTA between Hong Kong and Jersey is the first and only DTA Hong Kong has signed with a leading international offshore financial centre. This will give a boost to Jersey's reputation as one of the premier offshore financial centres in the world.
The Opportunities & the Future
Geoff Cook, chief executive, Jersey Finance, Jersey's promotional body has said:
"That China's GDP is expected to continue to grow at around 8% reaffirms that there are clear opportunities for Jersey to grow its private wealth management business through its specialist trust and foundation structures and popular expat banking services. Jersey's flexible company structures also continue to be attractive as capital market activity in Hong Kong accelerates. In all these areas, this DTA will add significantly to the reasons for investors and institutions to have confidence in and choose Jersey as their preferred European financial centre to invest in Western markets."
Zhaoan Li, Jersey Finance's Head of Business Development Greater China, added:
"The signing of the agreement comes at a time when a number of Jersey legal and financial services firms are opening offices in Hong Kong, which is fantastic news. Demonstrating a commitment like this to doing business is absolutely vital in the Hong Kong market, so this agreement is really important not just in a technical sense but also because it underpins Jersey's commercial relationship with Hong Kong too."
Appleby has also seen a greater awareness to Jersey and the use of Jersey vehicles in Asia. As a result we have seen an increasing workflow for Jersey related matters involving Asian clients and we have the ability to assist clients on such matters from both its Jersey and Hong Kong offices. Recently the Appleby Jersey and Hong Kong offices advised the Aluminum Corporation of China ("Chinalco") in its US$1.35 billion Joint Venture with Rio Tinto covering the development and operation of the Simandou iron ore project in Guinea, a deal that won the Energy and Resources Deal of the Year at the ALB China 2011 Law Awards.
The Appleby Jersey and Hong Kong offices have also been involved in several financings involving Jersey incorporated borrowers. Going forward, further growth is expected in the use of Jersey vehicles in Asia and more importantly a diversification in the types of transactions involving Jersey, especially as the main players in the market become more familiar with Jersey.
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