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Hong Kong and Bangladesh sign comprehensive double taxation arrangement
- Hong Kong signed a comprehensive double taxation arrangement (CDTA) with Bangladesh on 30 August 2023, largely based on the 2017 version of the Organisation for Economic Co-operation and Development Model Tax Convention.
- The CDTA will become effective in Hong Kong for tax years beginning 1 April 2024.
Executive summary
On 30 August 2023, Hong Kong signed a CDTA with Bangladesh that will become effective in Hong Kong for tax years beginning 1 April 2024 if the ratification procedures can be completed in 2023.
This Alert summarizes the key provisions of the CDTA.
Detailed discussion
Resident (Article 4)
A company is a Hong Kong tax resident if it is incorporated in Hong Kong or if incorporated outside Hong Kong and normally managed or controlled in Hong Kong. The "tie-breaker" rule for dual-resident companies considers where the company's place of effective management is situated.
Permanent Establishment (Article 5)
In addition to a fixed-place permanent establishment (PE), the CDTA covers other forms of PE, such as Construction PE, Service PE and Agency PE. Certain activities are listed as exempt from creating a PE, such as: using facilities for storage; display or maintenance of stock of the enterprise's own goods; processing, purchasing goods or merchandise; or collecting information, and other preparatory or auxiliary activities.
Business Profits (Article 7)
Article 7 of the CDTA restricts deductibility of expenses payable by the PE to a head office in the form of royalties, fees or commissions, among others. The CDTA also contains the exclusion for purchasing activity.
Taxation of Dividends (Article 10), Interest (Article 11), Royalties (Article 12), Technical Services Fees (Article 13) and Capital Gains (Article 14)
Passive streams of income like dividends, interest, royalties, technical services fees and capital gains are generally taxable in the resident jurisdiction. Such income may also be taxed in the source jurisdiction at the reduced withholding rates summarized below:
|
Income streams |
Dividends |
Interest |
Royalties |
Capital gains on disposal of shares |
Fees for technical services |
|---|---|---|---|---|---|
|
Normal withholding rate in Hong Kong |
0% |
0% |
Generally 4.95% |
0% |
0% |
|
Normal withholding rate in Bangladesh |
20% |
20% |
20% |
15% |
20% |
|
Reduced rate under the CDTA |
10/15%1 |
10%2 |
10% |
0%3 |
10% |
The CDTA also provides tax relief for Hong Kong residents deriving profits from international shipping transport in Bangladesh. They will enjoy 50% tax reduction in Bangladesh in respect of the profits subject to tax there.
Elimination of Double Taxation (Article 24)
To eliminate double taxation on a person, both jurisdictions allow a foreign tax credit against for jurisdictional taxes paid in the other jurisdiction.4
Prevention of treaty abuse
The CDTA contains the following specific provisions against treaty abuse:
- An introductory statement or preamble specifying that the CDTA is intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance
- The principal-purpose test (PPT) provisions whereby the granting of tax benefits under the CDTA would be denied if it is reasonable to conclude, considering all relevant facts and circumstances, that obtaining the benefits was one of the principal purposes of an arrangement or transaction; however the PPT would not apply if it is established that granting the tax benefits would be in accordance with the object and purpose of the relevant provisions of the CDTA
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Services Limited, Hong Kong
- Wilson Cheng
- Paul Ho, Financial Services
Ernst & Young LLP (United States), Hong Kong Tax Desk, New York
- Charlotte Wong
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
- Gagan Malik
- Dhara Sampat
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago
- Pongpat Kitsanayothin
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.