Hong Kong signs a comprehensive
Double Tax Agreement with Luxembourg
 

On 2 November 2007 the Government of the Hong Kong Special Administrative Region (HKSAR) and the Government of the Grand Duchy of Luxembourg signed an Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (DTA).

Once approved the Agreement will have effect in the HKSAR for any year of assessment beginning on or after 1 April 2008. In Luxembourg the Agreement will have effect from 1 January 2008 in respect of taxes withheld at source and for any taxable year beginning or after 1 January 2008 for other taxes.

In the Duchy of Luxembourg the DTA applies to Income Tax on Individuals, Corporation Tax, Capital Tax and Communal Trade Tax.

In the HKSAR the DTA applies to Profits Tax, Property Tax and Salaries Tax.

The DTA applies to persons who are residents in either or both of Hong Kong and Luxembourg. For Hong Kong this means that it applies to any person who is resident in Hong Kong for the purpose of Hong Kong taxation. A "person" for this purpose includes a company. The importance of the definition of residence in the DTA is that it adds another dimension to Hong Kong taxation as the concept of residence plays little part in determining domestic tax liabilities in Hong Kong due to Hong Kong's territorial system of taxation, and in the context of domestic liabilities, the residence of a person or a company has been derived from case law.

Article 4 of the DTA contains the following definitions of a Hong Kong resident.

Individual - (a) any individual who ordinarily resides in the HKSAR in any year of assessment; or (b) any individual who stays in the HKSAR for more than 180 days in a year of assessment or more than 300 days in two consecutive years of assessment, one of which is the relevant year of assessment.

Company - a company incorporated in the HKSAR or, if incorporated outside the HKSAR, which is "normally managed or controlled" in the HKSAR.

The main provisions regarding the taxation of income under the DTA are as follows.
 

	Income from immoveable property will be taxed in the jurisdiction in which the property is situated.
	Shipping and Air Transport - Income or profits derived by a Hong Kong enterprise from the operation of ships or aircraft in international traffic will be taxable only in the HKSAR.
	Business profits - A Hong Kong company which derives profits in Luxembourg will be subject to tax only in the HKSAR unless it carries on business in Luxembourg through a permanent establishment in Luxembourg, in which case it may be subject to tax in Luxembourg on the profits attributable to the permanent establishment.
	Interest income will usually be taxable in the jurisdiction in which it is received. However, if the recipient carries on business in the jurisdiction in which the payment is made through a permanent establishment in that jurisdiction (and the debt claim in respect of which the interest is paid is effectively connected to that permanent establishment) the amount shall be treated as the business profits of the permanent establishment. There is no Luxembourg withholding tax on interest paid to a Hong Kong resident. Under Hong Kong's territorial system of taxation interest income with a Luxembourg source will not be subject to tax in Hong Kong.
	Royalties are taxed in the recipient country. The DTA states that the rate of Luxembourg withholding tax on royalties paid from Luxembourg to a Hong Kong recipient shall not exceed 3%. However, at present Luxembourg does not impose withholding tax on royalties paid to Hong Kong residents and thus the DTA currently has no impact on such payments. Royalties paid by a Hong Kong company to a Luxembourg company are currently subject to withholding tax at the rates of 5.25% or 17.5%. Under the DTA the maximum rate of withholding tax will be 3%.
	Dividends may be taxed in the jurisdiction in which they are received. However, the HKSAR does not impose any tax on dividends from Luxembourg (or any other country). The advantage of the DTA for Hong Kong residents is that the rate of withholding tax in Luxembourg on dividends paid to Hong Kong residents will be reduced to 10%. If the HKSAR recipient is a company holding 10% or more of the share capital of the paying company (or has invested EUR1.2 million or more in the Luxembourg Company) the Luxembourg withholding tax will be reduced to Nil.
	Income from employment received by a HKSAR resident may be subject to tax in Luxembourg if the employment is exercised in Luxembourg unless the employee is not present in Luxembourg for periods of more than 183 days in a twelve month period and the remuneration is paid by or on behalf of an employer who is not a Luxembourg resident and the remuneration is not borne by a permanent establishment of the employer in Luxembourg.
	Director's fees will be taxed in the jurisdiction in which the company paying the director's fees is resident.
	Anti avoidance - The DTA deals with anti avoidance measures where "associated companies" undertake commercial and financial transactions "which differ from those which would be made between independent enterprises" and provides for such transactions to be reviewed and taxed as if the transaction had been conducted on an arms length basis with corresponding adjustments to the respective profits of the associated companies in both the HKSAR and Luxembourg. The DTA also contains anti avoidance measures in relation to the payment and taxation of interest and royalties.
	Elimination of Double Taxation - Where income is subject to tax in both Luxembourg and the HKSAR, the DTA provides for relief to reduce or eliminate the double taxation. Hong Kong residents may use any Luxembourg tax paid on income as a credit to offset their Hong Kong tax liabilities on the same income. However the tax credit may not exceed the Hong Kong tax on that income.

The DTA contains exchange of information provisions. Any information provided to the Authorities in Luxembourg by the HKSAR Authorities under Article 25 can only be used by the Luxembourg Authorities and cannot be disclosed to any other jurisdiction without the prior approval of the HKSAR Authorities.

The DTA will now be subject to "negative vetting" by the Legislative Council in Hong Kong. If it passes this hurdle the DTA will become effective in Hong Kong for years of assessment starting on or after 1 April 2008.

The DTA offers a number of tax savings as well as a greater degree of certainty for Hong Kong residents doing business in Luxembourg. This treaty and its interpretation will therefore be an important factor in considering investments in Luxembourg by Hong Kong residents.

Should you have any queries regarding this DTA please contact David Southwood, Gary James or your usual Grant Thornton contact partner.

If you wish to discuss the above please notify your usual Grant Thornton contact or contact:

Paul Chow
T + 852 2218 3188
E paul.chow@gthk.com.hk
　 　 　 　
David Southwood
T + 852 2218 3103
E david.southwood@gthk.com.hk
　 　
Gary James
T + 852 2218 3137
E gary.james@gthk.com.hk
　 　
Brenda Cheung
T + 852 2218 3136
E brenda.cheung@gthk.com.hk
　 　
　 　
The Hong Kong member of Grant Thornton International

Tax notes are issued in summary form exclusively for the information of clients and staff of Grant Thornton and should not be used or relied upon as a substitute for detailed advice. Accordingly Grant Thornton accepts no responsibility for any loss that occurs to any party who acts on the information contained herein without further consultation with ourselves.

Published by Grant Thornton 　

© Grant Thornton 2007