Representatives of the governments of Hong Kong and Macau on 25 November 2019 signed a new income tax treaty to address double taxation. The treaty or “arrangement” will enter into force once the formal ratification procedures are completed by both parties.
Among the measures in the income tax treaty are articles concerning the following items.
Permanent establishment (PE) article
Currently, a Hong Kong resident is subject to tax in Macau if it conducts business activities in Macau, even though the relevant activities may be limited (e.g., Hong Kong employees who travel to Macau to perform certain services for a short period of time). With the new tax treaty arrangement, a Hong Kong tax resident would not be subject to tax in Macau if the activities in Macau do not constitute a PE as defined in the treaty arrangement.
In addition to the standard definition of PE, the treaty arrangement also adopts the definition of dependent agent PE under the OECD BEPS Action 7. In simple terms, notwithstanding the absence of a fixed place of business, a Hong Kong enterprise could be regarded as having a PE in Macau if a Macau resident habitually concludes contracts in the name of the Hong Kong enterprise, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the Hong Kong enterprise. The treaty arrangement follows the latest standard of international tax rules to prevent the artificial avoidance of a PE.
Business income article
Currently, income earned by Macau residents in Hong Kong is subject to both Hong Kong and Macau income tax.
Under the treaty arrangement, double taxation could be avoided by way of exempting the income taxed in Hong Kong from Macau tax, or by crediting the Hong Kong tax paid against the Macau tax payable in respect of the same income. The treaty arrangement also provides for a credit against the Hong Kong tax payable for any Macau tax paid.
Capital gains article
Under the treaty arrangement, gains derived from the alienation of shares in a company—or comparable interest in other entities such as partnership and trusts—in which more than 50% of the assets comprised immovable property situated in one side at any time within the 365 days before the alienation of shares would be taxed to that territory.
Under the current local tax laws of Hong Kong and Macau, both jurisdictions generally do not tax gains on disposal of shares in a company incorporated in their respective jurisdictions or companies holding immovable property situated in their respective jurisdictions, provided that the relevant shareholder does not conduct any business activities in their respective jurisdictions. This article may, therefore, have limited application.
Employment income article
Short-term secondees and business travelers, under the treaty, could visit Macau for up to 183 days in any 12-month period, provided their costs are not borne by the employer’s PE or fixed base in Macau. Further, a qualified teacher or researcher who is employed by the qualified education or research institution in one side; and who engages in teaching or research activities for qualified education or research institution on the other side, would be exempt from tax on that other side in respect of the remuneration derived from the above activities for a period of three years. This is subject to the proviso that the relevant remuneration has been subjected to tax on the side where the person concerned is employed.
Passive income withholding tax
The Hong Kong withholding tax on royalties would be, under the treaty arrangement, reduced from the standard rate of 4.95% to 3% in most situations.
Under the treaty arrangement, withholding tax on dividend and interest would be reduced to 5%. However, given that Hong Kong and Macau currently do not levy withholding tax on dividend and interest, the reduced withholding tax rate would not be generally relevant.
The new treaty arrangement is viewed as offering additional incentives for taxpayers to conduct business, invest in, and exchange of talent, and thus could promote economic growth of the Guangdong-Hong Kong-Macau greater bay area.
For more information contact a KPMG tax professional:
David Ling | +1 609 874 4381 | email@example.com
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