On November 11, 2012, Canada signed a tax treaty1
with Hong Kong (the "Tax Treaty"). Some
may find it surprising, given the level of trade between Canada and
Hong Kong and the number of Hong Kong residents who have immigrated
to Canada, that Canada did not previously have a tax treaty in
place with Hong Kong. Canada has had a tax treaty with China for a
number of years, but it did not include Hong Kong.
In the past, Hong Kong residents would have to implement complex
structures through countries having tax treaties with Canada in
order to minimize Canadian taxes and/or avoid double taxation.
Otherwise, residents of Hong Kong previously wishing to carry on
business or invest in Canada would be subject to Canadian tax on
all income earned in Canada at the applicable Canadian tax rates
(up to 31% combined federal and provincial tax for corporations)
and to a withholding tax of 25% on dividends, interest and
royalties, in addition to any Hong Kong taxes they may be subject
A Hong Kong resident could be carrying on business in Canada
simply by selling goods in Canada or by servicing equipment in
Canada. Once the Tax Treaty comes into force, business income
earned by a Hong Kong resident in Canada will only be taxed in
Canada, to the extent that such income is earned through a
"permanent establishment" in Canada. A Hong Kong resident
will generally have a permanent establishment in Canada if he, she
or it has a physical presence in Canada, such as an office, store
or other location through which business is carried on.
The Tax Treaty may not have as much of an impact on Canadian
residents investing in Hong Kong. Hong Kong does not have a
withholding tax on dividends or interest and its corporate tax rate
is relatively low at 16.5%. However, residents of Canada wishing to
carry on business or invest in Hong Kong would previously still be
subject to Hong Kong tax on any income derived from or arising in
Hong Kong at the applicable Hong Kong tax rate and to a withholding
tax of up to 16.5% on royalties, in addition to any Canadian taxes
they may be subject to.
As with Hong Kong residents carrying on business in Canada, once
the Tax Treaty is in force, Canadians earning business income in
Hong Kong will only be taxed to the extent that such income is
earned through a permanent establishment in Hong Kong.
Recently, Canada has included a limitation of benefits article
in their tax treaties. Where tax treaties include a limitation of
benefits provision, residents of a treaty country could generally
only benefit under the treaty to the extent that they are true tax
paying residents of that country. The Tax Treaty with Hong Kong
does not contain a limitation of benefits article which means that
a person generally only needs to be a resident of Hong Kong to
benefit under the Tax Treaty.
Under the Tax Treaty, Hong Kong residents receiving dividends
from Canada will be entitled to a reduced dividend withholding rate
of 5% when dividends are paid to a corporation that controls at
least 10% of the capital of the payor corporation, and, in any
other case, to a reduced withholding rate of 15%. The Canadian
withholding rate will be reduced to 10% under the Tax Treaty on
interest and royalties paid to Hong Kong residents. Arm's
length interest is generally not subject to Canadian withholding
tax, even without a tax treaty, but the 10% rate will be welcome in
non-arm's length situations.
Since Hong Kong does not tax dividends or interest, as in the
past, no tax will be withheld from dividends or interest paid to
Canadian residents. However, the Hong Kong withholding rate on
royalties will be reduced to 10% under the Tax Treaty.
As with most of Canada's tax treaties, the Tax Treaty
includes an exchange of information article. This means that Canada
could request information from Hong Kong with respect to Canadian
residents for Canadian tax purposes, and vice versa.
The Tax Treaty will come into force following the ratification
procedures in both Canada and Hong Kong.
1. Agreement between the Government Of Canada and the
Government of the Hong Kong Special Administrative Region of the
People's Republic of China for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on
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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An Israeli investor is investing in the Czech Republic. A substantial part of the investment will be financed with debt. As the Czech withholding tax on interest paid to Israel is 10%, he wonders whether this withholding tax can be avoided by structuring the loan through a third country.
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