The income tax treaty between Hong Kong and Canada (the
"Treaty") first signed on November 11, 2012 has now been
formally ratified and is in force as of October 29, 2013.
The Treaty will apply (i) for most Canadian purposes, for amounts
paid or taxation years beginning on or after January 1, 2014, and
(ii) for Hong Kong purposes, for any year of assessment beginning
on or after April 1, 2014. Broadly speaking, the Treaty will
encourage cross-border business and investment, allow businesses
and investors to better determine their cross-border tax profile,
and provide protection against tax discrimination and potential
double taxation.
For Canadian companies, benefits of the Treaty will include the
ability to repatriate after-tax active business profits from Hong
Kong to Canada as "exempt surplus" free of Canadian
tax.
For residents of Hong Kong, benefits of the Treaty will
include:
- A Treaty-reduced withholding tax rate of only 5% for cross-border dividends paid by a Canadian-resident corporation, if the Hong Kong dividend recipient is a company that controls at least 10% of the votes of the dividend payer (otherwise the dividend will normally be subject to a 15% Treaty rate of withholding)
- Treaty-reduced withholding tax rates for interest payments (a Treaty withholding rate of 10% will generally apply in circumstances where the payment does not otherwise qualify for Canada's 0% withholding rate on interest paid to arm's length parties), and for royalty payments (10%)
- Residency tie-breaker rules that may help international business principals who have family or business connections in both Canada and Hong Kong
The Treaty rate of 5% on cross-border dividends compares
favourably to other tax treaties (the corresponding rate under
Canada's tax treaty with China is 10%, for example), and can be
beneficial for Chinese investment in Canada through a Hong Kong
company, or for Canadian outbound investment through a Hong Kong
company. The use of a Hong Kong company as an intermediary is
intuitive given Hong Kong's position as a financial gateway and
the potential tax advantages, but the Hong Kong company must have
sufficient substance, and the potential application of
anti-avoidance principles mandates obtaining professional advice in
advance.
With its Hong Kong office, McMillan LLP is well-positioned as a
gateway for Hong Kong and Chinese companies looking to access the
North American markets, and for Canadian companies looking to
access Hong Kong and China. Our tax team has the depth and
experience to help you achieve your goals.
About McMillan LLP
McMillan is a leading Canadian business law firm committed to
client service and professional excellence for over 100 years. With
recognized expertise and acknowledged leadership in major business
sectors, McMillan provides definitive Canadian legal advice to
businesses, financial institutions, governments and private
individuals in Canada, the United States and internationally. The
firm has offices in Vancouver, Calgary, Toronto, Ottawa,
Montréal and Hong Kong. McMillan stands as a truly modern
and ambitious law firm with a broad range of expertise offering
effective, innovative solutions to Canadian and international
clients.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
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