Double Tax Avoidance Agreement (DTAA) Between India and Hong Kong

The double taxation system involves levying taxes by two nations on an assessee’s income from the same source. For foreign nationals and NRIs, double taxation is a significant issue while doing business in India. Hence, India has signed the Double Tax Avoidance Agreement (DTAA) with almost 100 countries to mitigate the challenges of paying double taxes for the assessee.

Foreign nationals and NRIs might have income in a foreign country they belong to and an income source in India. In such cases, a taxpayer might have to pay taxes twice. The DTAA convention helps to avoid such unfair tax systems and maintain strong trade relations between countries.

This article will examine the DTAA between India and Hong Kong, helping us understand the details of ways to avoid double taxes.

DTAA between India and Hong Kong

DTAA convention applies to individuals who are residents of both or one of the two Contracting Parties, i.e., India and Hong Kong. When an Indian resident earns income that, under the terms of DTAA, may be taxed in the Hong Kong Special Administrative Region, India shall deduct from the resident's income a tax amount equal to the tax payable to the former.

Alternatively, when a resident of Hong Kong has income sources in India, the Hong Kong Special Administrative Region will deduct tax at the rate applicable to the latter. 

As per India Hong Kong DTAA, if an individual is a resident in both countries, the residential status of that person is determined as per the following:

• Centre of Vital Interests
• Process of Mutual Agreement Procedure (MAP)
• Availability of permanent home
• Habitual abode
• Right of nationality

Moreover, this tax treaty allows different investors from India and Hong Kong to gain tax benefits and improve commercial relations. Having a low tax regime makes Hong Kong an attractive location for trade for investors from India. Thus, the treaty is crucial from the perspective of both countries to avoid paying double taxes on the same income.

Significance of DTAA for India and Hong Kong

India and Hong Kong signed the DTAA on the 19th of March, 2018. However, it came into force on the 30th of November, 2018, after completing all relevant procedures. Some key benefits of India Hong Kong DTAA for both countries are as follows:

• DTAA helps stimulate investment flow as double tax payments are avoided for investors.
• The flow of personnel and technology from India to Hong Kong and vice versa helps to achieve the economic growth of both nations.
• The provision of eliminating double taxes and the exchange of information helps mitigate any economic issues arising among nations.
• It also improves transparency on taxation, thus helping to curb tax avoidance and evasion by individuals and businesses.
• Different exemptions and tax credits are offered to the taxpayers and investors of both countries.

Taxes Covered under DTAA

DTAA between India and Hong Kong explains the different taxes covered by both countries under Article 2. They are:

• The Agreement applies to taxes on income enforced in place of the Contracting Party, its local authorities or political subdivisions, disregarding how it gets levied.
• The treaty applies to the following existing taxes:
• For Hong Kong, the taxes included are property tax, profits tax, and salary taxes.
• For India, the tax considered is income tax, including surcharges.
• The Agreement also applies to any identical or similar taxes imposed after signing the Agreement, in addition to or in place of the existing taxes, and any other taxes falling in the above paragraph that a Contracting Party may impose in future. The Contracting Parties' competent authorities must notify each other of any substantial changes to their respective tax laws.
• Any existing tax and tax imposed after signing the Agreement are called the "Hong Kong Special Administrative Region tax" or "Indian tax," depending on the context. Nonetheless, the terms "Hong Kong Special Administrative Region tax" or "Indian tax" will not impose any interest, fine, or penalty as per the laws of the Contracting Party.

India-Hong Kong DTAA Tax Rates

The tax rates applicable as per India-Hong Kong DTAA are as follows:

• Royalty: 10%
• Dividend: 5%
• Fees for technical services: 10%
• Interest: 10%*

*Note: Interest earned by the government and some designated organisations, including the Reserve Bank of India, are tax-free in the nation of origin.

Taxation on Capital Gains under DTAA

Article 14 of DTAA between India and Hong Kong deals with the taxation policies applicable to capital gains. They are:

• A resident of one Contracting Party deriving gains from the alienation of immovable properties and situating it in the other Contracting Party might get taxed in the other Party.
• Capital gains from the alienation of aircraft or ships operated at the international level or any movable property according to operations of such aircraft or ships shall only be taxable in the Contracting Party of the alienator's residence.
• Gains from the sale of shares in a corporation based in a Contracting Party may get taxed in that Party.
• A resident of one Contracting Party deriving gains from alienating company shares and deriving more than 50% of the asset value indirectly or directly from immovable property placed in the other Contracting Party may get taxed in the other Party.
• The advantages of this Article will not be accessible if the actual purpose or one of the main goals of any person involved in the alienation of property from which capital gains are received is to take advantage of this Article through such alienation.

Final Words

The treaty to avoid double taxation is significant for India and Hong Kong. This agreement shall remain in force indefinitely until terminated by one of the parties. It is made to help investors and individuals to avoid paying double taxes on the same income. As a taxpayer, it is your duty not to evade tax in fear of paying double taxes. 

You can easily claim tax credits and exemptions if an income has already been taxed in one country. Following the India-Hong Kong DTAA guidelines will help you save on taxes, irrespective of which Contracting Party your income comes from. 
 

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