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News (November 18, 2010)


Hong Kong signs agreement with Japan on avoidance of double taxation

On November 9, 2010, gAgreement between the Government of the Hong Kong Special Administrative Region of the Peoplefs Republic of China and the Government of Japan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on incomeh was signed between the Government of Japan and the Government of the Hong Kong Special Administrative Region of the Peoplefs Republic of China (gHong Kongh), in Hong Kong. This double tax agreement (DTA) was signed after reaching to a basic consensus by the two governments in March 2010 and the succeeding procedures of determining the provision details.

The two main purposes of the DTA are as follows.

  1. For adjusting international double taxation, it sets out clearly the allocation of taxing rights between Japan and Hong Kong, and the framework for negotiations by the tax authorities (including arbitration procedures) to enhance smooth settlement of the taxation issues between the two jurisdictions. It is expected to foster more investment and economic exchanges between the two places.
  2. The DTA enables the exchange of effective information between each tax authority based on the international standards, and it contributes to prevent international tax evasion and avoidance which are globally regarded as important issues such as at G20.

The DTA will come into force 30 days after the completion of domestic ratification procedures on both sides, (for Japan, admission from the Diet is necessary) and notification of the completion is made to each other. The days will be counted from the later day of the notification. . In Japan, the DTA, after effectuation, will be applied as follows:

  1. With respect to the taxes withheld at source, for amounts taxable on or after January 1 in the calendar year next following that in which the notice is given;
  2. With respect to the taxes on income which are not withheld at source, as regards income for any taxable year beginning on or after January 1 in the calendar year next following that in which the notice is given; and,
  3. With respect to other taxes, as regards taxes for any taxable year beginning on or after January 1 in the calendar year next following that in which the notice is given.

After the DTA becomes effective, it will be possible to apply mutual agreement procedure to avoid double taxation regarding transactions with Hong Kong in the similar way as the transactions with other major countries such as U.S. or China, when being assessed with transfer pricing taxation etc. Therefore, taxation risks for Japanese entities with related companies in Hong Kong will decrease and at the same time, it is expected that more Japanese entities will consider starting business in Hong Kong.

Points of the DTA

  1. Mutual agreement procedure: Where one considers that the result of the assessment is not in accordance with the provisions of this DTA, one may apply for the negotiation between the tax authorities (within three years from the first notification of the assessment).
  2. Arbitration: For any issues unsolved within two years thorough the process of mutual agreement, taxpayers may request for arbitration. The provision regarding arbitration is the second case for Japan following the Tax Treaty with the Netherlands (signed in August, 2010).
  3. Investment income (dividends, interests and royalties): Taxation with regard to the investment income will be reduced as indicated below (however, no withholding tax regarding payment of dividends and interests from Hong Kong to Japan has been imposed in Hong Kong).



  4. Limitation of the taxation on permanent establishment (PE): With respect to the income on business activities, only in the case where entity is doing business through a permanent establishment (branch, etc.) in the other country, the income generated from the activities of the permanent establishment is taxed in the other country.
  5. The limitation of the transfer pricing taxation assessment period is set as seven years (from the end of the subject taxable year)
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