Hong Kong has recently signed a comprehensive double taxation agreement (CDTA) with India. This brings the number of CDTAs Hong Kong has concluded with other jurisdictions to 39.  It is expected that Hong Kong will sign more and more CDTAs with other jurisdictions and in particular, with the Belt and Road countries (e.g. India).  If the CDTA with India is ratified and enters into force within 2018, it will become effective from the year of assessment 2019/2020 in Hong Kong; and from fiscal year beginning on 1 April 2019 in India.

The following table provides a comparison of withholding tax rates on certain passive incomes received by a Hong Kong resident from India:

  CDTA rates Domestic rates (India)
Dividends 5% Nil
Interests 10% 20% generally
Royalties 10% 10%

 

The Hong Kong/India CDTA does not offer any tax exemption for gains derived from disposal of shares in an Indian company. Having said that, the tax exemption treatment for such gains under the existing India/Mauritius and India/Singapore tax treaties will gradually be removed although there is a grandfathering provision for shares acquired before 1 April 2017 in these two treaties.  This means that, eventually, Hong Kong will be on an equal footing with Mauritius and Singapore in terms of taxation of capital gains arising from the transfer of shares in an Indian company.  Besides, the withholding tax rate for interest income derived by non-financial institutions under the Hong Kong/India CDTA (i.e. 10%) is lower than that under the Singapore /India tax treaty. Accordingly, Hong Kong companies currently investing into India through a Mauritius or Singapore intermediate holding company may consider streamlining the holding structure and replacing it with a direct investment into India.  Moreover, the Hong Kong company under the streamlined structure may be eligible for a 50% reduction in its profits tax rate if the company operates as a recognized corporate treasury centre in Hong Kong.

The above preferential withholding tax rate on interests received by a Hong Kong resident from India will facilitate Hong Kong playing the role of super-connector, in terms of provision of finance from Hong Kong in respect of projects undertaken in India, which is a strategic economy along the Belt and Road Initiative of mainland China.

Contributed by: Anthony Hung, of Masson de Morfontaine, E: anthony@masson-de-morfontaine.com W: www.masson-de-morfontaine.com