Hong Kong Tax Alert: 29 January 2013
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 Italy unless they are attributable to a permanent establishment (PE) maintained by the Hong Kong enterprise in Italy. Where a Hong Kong enterprise has maintained a PE in Italy, only profits attributable to the PE will be liable to tax in Italy.
In addition to the general definitions of the term PE, a Hong Kong resident enterprise will be specifically considered as maintaining a PE in Italy 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 (including consultancy services) by a Hong Kong resident enterprise directly or through employees or other personnel, in connection with a site, a project or supervisory activities referred to in (1) above, if those services continue in Italy for a period or periods aggregating more than 6 months within any 12-month period
- A Hong Kong resident enterprise will not be liable to tax in Italy if it simply maintains a buying office in Italy which only makes purchases for the Hong Kong resident enterprise.
- Hong Kong resident airliners and ship owners will not be subject to tax in Italy in respect of profits derived from international traffic. However, income of a Hong Kong resident airliner so exempt from taxation in Italy 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 Italian resident enterprise in such a way that the profits that accrue to the Italian resident enterprise are less than would accrue on an arm’s length basis, the Italian tax authorities can make a primary adjustment to increase the profits of the Italian resident enterprise to an arm’s length result. In such a case, the Hong Kong tax authorities shall make an appropriate adjustment to the profits of the Hong Kong resident enterprise in accordance with the mutual agreement procedure provided for in Article 24 (Mutual Agreement Procedure) of the CDTA.
Independent personal services
Income derived by a Hong Kong resident individual from the provision of professional services or other independent activities of a similar character may be liable to tax in Italy if:
- He has a fixed base regularly available to him in Italy for the purpose of performing his activities, but only to the extent of the income attributable to that fixed base
- He stays in Italy for a period or periods amounting to or exceeding in the aggregate of 183 days in any twelve-month period commencing or ending in the taxable period concerned, but only to the extent of the income derived from his activities performed in Italy.
For this purpose, the term “professional services” includes especially, independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.
Exemption or reduction of tax on dividends, interest and royalties
Subject to a specific anti-avoidance provision applicable to dividends, interest and royalties, the following table summarizes the applicable withholding rates for the captioned income flows received from Italy by a Hong Kong resident as beneficial owner.
|Normal withholding rate||20%1||20%1||30%1,4|
|Reduced rate under the CDTA||10%2||0%/ 12.5%2,3||15%2|
Capital gains on disposal of shares
Capital gains derived by a Hong Kong resident investor on the disposal of shares in an Italian entity will generally be exempt from tax in Italy under the CDTA, unless the shares being disposed of are in respect of a company holding substantial immovable property located in Italy and said shares are not quoted on the stock exchanges of Hong Kong, Italy or any other stock exchanges agreed between the competent authorities
- For non-residents who are not European Union resident corporations or Swiss resident corporations.
- The mode of application of the reduction in the rates of withholding taxes shall be settled by mutual agreement between the competent authorities of Hong Kong and Italy.
- 0% rate applies in the following situations:
- The interest is paid by the Italian government or a local authority thereof
- The interest is paid to the Hong Kong government, a political or administrative subdivision or a local authority of the Hong Kong government, or any agency or instrumentality wholly owned or appointed by the Hong Kong government or any of its political or administrative subdivision or local authority and which carries out activities of a government nature.
For other cases, 12.5% rate applies.
- In certain circumstances, the tax applies to 75% of the gross amount, resulting in an effective tax rate of 22.5%.