Hong Kong Tax Alert: 6 May 2013
Tax benefits available to Hong Kong residents under the CDTA
The general corporate tax rate in Guernsey is currently 0%. Except for certain limited types of income, business profits derived in Guernsey by a Hong Kong resident company are therefore generally tax-free in Guernsey. In the event that Guernsey raises its corporate tax rate in future, the following tax benefits would be available to Hong Kong resident companies under the CDTA.
- Active business profits of a Hong Kong resident enterprise will not be liable to tax in Guernsey unless they are attributable to a permanent establishment (PE) maintained by the Hong Kong enterprise in Guernsey. Where a Hong Kong enterprise has maintained a PE in Guernsey, only profits attributable to the PE will be liable to tax in Guernsey.
In addition to the general definitions of the term PE, a Hong Kong resident enterprise will be specifically considered as maintaining a PE in Guernsey under the CDTA in the following situations:
- Having a building site, a construction, assembly or installation or supervisory activities in connection therewith, 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 Guernsey 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 Guernsey if it simply maintains a buying office in Guernsey which only makes purchases for the Hong Kong resident enterprise.
- Hong Kong resident airliners and ship owners will not be subject to tax in Guernsey in respect of profits derived from international traffic. However, income of a Hong Kong resident airliner so exempt from taxation in Guernsey under the CDTA will be charged to tax in Hong Kong under the relevant provisions of the Hong Kong tax code.
- Where a Hong Kong resident enterprise transacts business with an associated Guernsey resident enterprise in such a way that the profits that accrue to the Guernsey resident enterprise are less than would accrue on an arm’s length basis, the Guernsey tax authorities can make a primary adjustment to increase the profits of the Guernsey resident enterprise to an arm’s length result. In such a case, the Hong Kong tax authorities are obliged under Article 9 (Associated Enterprises) of the CDTA to make an appropriate adjustment to the profits of the Hong Kong resident enterprise so as to avoid double taxation.
Exemption or reduction of tax on dividends, interest, and royalties, and the treatment of capital gains on disposal of shares
The following table summarizes the applicable withholding rates for the captioned income flows received from Guernsey by a Hong Kong resident as beneficial owner.
|Passive income||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 Guernsey. In the event that Guernsey imposes withholding tax in future, the rate will be restricted to not more than 4%.
- Currently, Guernsey does not impose a tax on capital gains. In the event that Guernsey imposes capital gains tax in future, capital gains derived by a Hong Kong resident investor on the disposal of shares in a Guernsey entity will nevertheless, generally be exempt from tax in Guernsey under the CDTA.