Tax Agreement Between Hong Kong And Finland Signed

Hong Kong (China) and Finland signed a comprehensive agreement for avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (hereinafter as “the agreement”). This agreement will come into force on the 30th day after both contracting parties notify the completion of their domestic ratification procedures and the Double Taxation Agreement with respect to Taxes on Income from Aircraft Operation signed in 2007 will cease to have effect.

The Agreement

This treaty applies to taxes on income, including taxes on gains from the alienation of movable or immovable property as well as taxes on capital appreciation. A summary of some key provisions can be found below:

  • Art.5 (Permanent Establishment): the definition of permanent establishment (PE) is substantially identical to the 2011 UN model but with different timing thresholds. The threshold for project PE is nine months, while the criteria for service PE is 270 days within any twelve-month period. Besides, when carrying business through an independent agent, it doesn’t matter whether the agent runs its business wholly or partially on behalf of that enterprise.
  • Art.6 (Income from Immovable Property): the allocation rules for income from immovable property (Art.6) follows the Situs principle.
  • Art.10 (Dividends): the agreement limits the withholding tax rate to 5% for company beneficial owners with at least 10% of voting rights, and 10% for all other cases.
  • Art.11 (Interest): different from the OECD/UN Model, the agreement gives exclusive right to resident state to tax if the resident recipient is the beneficial owner of the interest.
  • Art.12 (Royalties): the agreement provides shared taxing rights between the resident state and source state. The tax rate cap is 3% of the gross amount of royalties. In particular, a source rule is introduced where a PE payer is involved in paragraph 5.
  • Art.13 (Capital Gains): specially, resident Party has the exclusive right to tax gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft.

Relief Method

Generally, the credit method is adopted to eliminate the double taxation arising between the two Contracting States. However, dividends should be exempt from Finish tax if they are paid by a company being a resident of Hong Kong to a company which is a resident of Finland and which controls directly at least 10 percent of the voting power in the company paying the dividends.

Anti-Abuse

The principle purpose test is included in Article 21 of this Treaty. Treaty benefits could be denied if obtaining that benefit was one of the principal purpose of the arrangement or transaction, unless it is established that granting that benefit would be in accordance with the object and purpose of the relevant provisions of this Agreement. Besides that, the agreement gives priority to domestic law and measures concerning the prevention of tax avoidance of each Contracting Party, which insofar do not give rise to taxation contrary to the agreement.

Sources: IRD – HK, the Agreement

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