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Hong Kong; Portugal

3 June 2012

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Tax agreement between Hong Kong and Portugal – details

2 April 2012

Details of the income tax agreement and protocol between Hong Kong - Portugal Income Tax Agreement (2011), signed on 22 March 2011, have become available. The treaty was concluded in the Chinese, Portuguese and English languages, each text having equal authenticity. In the case of divergence, however, the English text prevails. The agreement generally follows the OECD Model Convention.

The maximum rates of withholding tax are:

-   10% on dividends in general; 5% if the receiving company is a beneficial owner (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends;
-   10% on interest; subject to exceptions including an exemption for interest paid (i) to the government of a contracting state, and (ii) to financial establishments appointed by the governments of the contracting states;
-   5% on royalties; there are no provisions for managerial or technical service fees.

Deviations from the OECD Model include that:

the term permanent establishment (PE) includes the furnishing of services, including consultancy services, by an enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting Party for a period or periods aggregating more than 183 days within any 12-month period.(Art.5 (3)(b));

-   Art. 7 of the treaty follows the article on Business profits of the UN Model Convention (2001). Additionally it provides that no profits shall be attributed to a permanent establishment (PE) by reason of the mere purchase by that PE of goods or merchandise for the enterprise (Art.7(5)); and
-   Art. 12 of the treaty follows the article on Royalties of the UN Model Convention (2001).

Hong Kong generally applies for the credit method to avoid double taxation. Portugal generally applies for the exempt method to avoid double taxation.

Under the protocol, a limitation of benefits clause is introduced according to which Arts. 10 (Dividends), 11 (Interest), 12 (Royalties), 13 (Capital Gains) and 21 (Other income) do not apply if the dividends, loans, rights, alienation, or other income payments are created with the main purpose, or have as one of their main purposes, of obtaining treaty benefits.

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