Russian Agreement Advances Hong Kong’s DTA Priorities

Hong Kong’s newly signed double tax deal with Russia is said to support the territory’s ongoing efforts to expand its tax treaty network with jurisdictions along “the Belt and Road.”

The Belt and Road, or the Silk Road Economic Belt, is a Chinese Government economic development project, which is primarily aimed at integrating trade and investment among around 60 Eurasian countries.

During his recent 2016 Policy Address, Hong Kong’s Chief Executive, C Y Leung, said: “Hong Kong will expand its networks of investment protection agreements, comprehensive double tax agreements (CDTAs), and agreements on double taxation relief arrangements for shipping income, with a view to protecting and facilitating business co-operation between Hong Kong and the Belt and Road countries. For this purpose, we will seek to negotiate as soon as possible with those countries which have yet to sign these agreements.”

“This is the 34th CDTA that Hong Kong has signed with its trading partners,” Hong Kong’s Secretary for Financial Services and the Treasury, K C Chan, confirmed. “The CDTA [with Russia] sets out clearly the allocation of taxing rights between the two jurisdictions and thus will help investors better assess their potential tax liabilities from cross-border economic activities.”

In the absence of a CDTA, the profits of Hong Kong companies doing business through a permanent establishment in Russia may be taxed in both places if the income is sourced in Hong Kong. Under the agreement, double taxation will be avoided as any Russian tax paid by the companies on their income will be allowed as a credit against tax payable in Hong Kong.

Under the agreement, Russia’s withholding tax rate on royalties, currently at 20 percent (for companies) or 30 percent (for individuals), will be capped at three percent. Russia’s dividend withholding tax rate on Hong Kong residents will be reduced from the current rate of 15 percent to five percent or 10 percent, depending on the recipient’s shareholding in the payee.

In addition, Hong Kong airlines operating flights to Russia will be taxed at Hong Kong’s corporation tax rate, and will not be taxed in Russia. Profits from international shipping transport earned by Hong Kong residents that arise in Russia, which are currently subject to tax there, will also not be taxed in Russia.

The CDTA also includes a provision for the exchange of tax information between the two jurisdictions in line with international standards.

The agreement will come into force after the completion of ratification procedures on both sides.