Active business profits of a Hong Kong resident enterprise will not be liable to tax in Jersey unless they are attributable to a permanent establishment (PE) maintained by the Hong Kong enterprise in Jersey.
On 24 February 2012, Hong Kong signed a comprehensive double taxation agreement (CDTA) with Jersey. This brings the number of CDTAs Hong Kong has concluded with other jurisdictions to twenty-three.
The CDTA with Jersey contains several favorable provisions, which are expected to boost closer economic and trade ties between Hong Kong and Jersey. This alert summarises the salient points of those provisions as applicable to Hong Kong residents.
Who is covered by the CDTA
The CDTA only applies to persons who are residents of either Hong Kong or Jersey. In this regard, a company that is incorporated or constituted under the laws of Hong Kong automatically qualifies as a Hong Kong resident.
For a company which is not so incorporated or constituted, it would be regarded as a Hong Kong resident only if it is “normally managed or controlled” in Hong Kong, a residence test commonly used in other CDTAs Hong Kong has concluded.
Tax benefits available to Hong Kong residents under the CDTA
- Active business profits of a Hong Kong resident enterprise will not be liable to tax in Jersey unless they are attributable to a permanent establishment (PE) maintained by the Hong Kong enterprise in Jersey. Where a Hong Kong enterprise has maintained a PE in Jersey, only profits attributable to the PE will be liable to tax in Jersey.
In addition to the other general definitions of the term PE, a Hong Kong resident enterprise will also be specifically considered as maintaining a PE in Jersey under the CDTA in the following situations:
- Having a building site, a construction, assembly or installation project or supervisory activities in connection therewith in Jersey, but only if such site, project or activities last more than 6 months
- The furnishing of services (for the same or a connected project) by a Hong Kong resident enterprise directly or through employees or other personnel in Jersey continue for a period or periods aggregating more than 183 days within any 12-month period
- A Hong Kong resident enterprise will not be liable to tax in Jersey if it simply maintains a buying office in Jersey which only makes purchases for the Hong Kong resident enterprise.
- Hong Kong resident airliners and ship owners will not be subject to tax in Jersey in respect of profits derived from international traffic.
Exemption or reduction of tax on dividends, interest, and royalties, and the treatment of capital gains on disposal of shares
The following table summarises the applicable withholding rates for the captioned income flows received from Jersey by a Hong Kong resident as beneficial owner.
|Passive income / Tax rate ||Dividends ||Interest ||Royalties ||Capital gains on disposal of shares |
|Normal withholding rate ||0% ||0% ||0% ||0% |
|Reduced rate under the CDTA ||0% ||0% ||0%1 ||0%2 |
- Currently, there is no withholding tax on outflow of royalties in Jersey. In the event that Jersey imposes withholding tax in future, the rate will be restricted to not more than 4%.
- Currently, Jersey does not impose a tax on capital gains. In the event that Jersey imposes capital gains tax in future, capital gains derived by a Hong Kong resident investor on the disposal of shares in a Jersey entity will nevertheless, generally be exempt from tax in Jersey under the CDTA.