The India-Hong Kong DTAA enters into force from 30th November, 2018. The same would be effectively applicable from 01st April, 2019. Accordingly, the benefit of the provisions of the DTAA can be claimed in respect of the income derived in any year starting from April 1, 2019. The companies engaged into cross-border transactions with Hong Kong were eagerly awaiting this DTAA to become effective. The articles of India-Hong Kong DTAA are aligned with BEPS and MLI in order to curb tax evasion/ avoidance, treaty shopping practices, conduit companies practices etc. Now, the companies resident in India as well as Hong Kong would be able to take shelter under the treaty, thereby, avoiding double taxation and/ or taxation at higher rates.
The key highlights of the India-Hong Kong DTAA are given below:
A) Base Erosion and Profit Shifting (BEPS) AND Multi-Lateral Instrument (MLI)
Articles of the India – Hong-Kong DTAA are aligned to the provisions of Multilateral Instrument to implement tax treaty related measures to prevent Base Erosion and Profit Shifting.
B) Permanent Establishment (PE)
– Article on Permanent Establishment (PE) includes amongst others service PE clause with a threshold of 183 days within a 12 month period.
C) Shipping and Air Transport
– Profits from operation of Aircraft in international traffic – Taxable only in the POEM state.
– Profits from operation of ships in international traffic – Taxable in POEM state. However, it may also be taxed in other contracting states. The tax imposed on such profits shall be reduced by 50%.
Dividend income is to be taxed at the rate of 10% subject to satisfying beneficial ownership test.
Interest income is to be taxed at the rate of 10% subject to satisfying beneficial ownership test.
F) Royalty and FTS
– Royalty payable to a resident of Hong Kong to be taxed at the rate of 10% subject to satisfying beneficial ownership test.
– Fees for technical services payable to a resident of Hong Kong to be taxed at the rate of 10% subject to satisfying beneficial ownership test.
G) Capital Gains
– Capital gain arising on sale of shares of an Indian company to be chargeable to tax in India.
– Capital gain arising on sale of Indian companies shares not covered under clause 1 to 4 to be chargeable to tax in India.
– Residual para for taxation of property not covered above including indirect transfer cases – To be taxable as per the provisions of the domestic laws.
H) Other Income
Other income arising in India will be chargeable to tax in India.
I) GAAR Provisions
The provisions relating to GAAR has been inserted in Dividends, Interest, Royalty, FTS and Capital Gains Article.
J) LOB Clause – Anti-Avoidance Rules (Tax Evasion and Tax Avoidance)
Separate article inserted in order to curb tax evasion/ avoidance, treaty shopping practices, conduit companies practices etc.
A Protocol has been annexed to the India – Hong-Kong DTAA. Protocol Contains explanation for the meaning of the certain terms like ‘Ordinarily resides’, ‘right of abode’ etc.
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Source- http:// https://www.incometaxindia.gov.in, https://www.wikipedia.org