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Spain; Hong Kong

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Tax agreement between Spain and Hong Kong – details

Details of the income tax agreement and protocol between Spain and Hong Kong, signed on 1 April 2011, have become available. The agreement was concluded in the Spanish and English languages, each text having equal authenticity. The agreement generally follows the OECD Model Convention.

The maximum rates of withholding tax are:

-   10% on dividends in general, 0% if the receiving company is a beneficial owner (other than a partnership) which holds directly at least 25% of the capital of the company paying the dividends;
-   5% on interest; an exemption applies on interest payments to the government and other government bodies and institutions as defined; and
-   5% on royalties; there are no provisions for managerial or technical service fees.

Deviations from the OECD Model include that a permanent establishment includes:

-   a building site or construction or installation project constitutes a permanent establishment only if such site or project last more than 9 months (Art. 5(3) of the Agreement);
-   profits attributed to a PE may be determined on the basis of an apportionment of the total profits of the enterprise or any other method prescribed by law if the result is in accordance with Art. 7 of the Agreement (Art. 7(4) of the Agreement);
-   the definition of "royalties" includes payments for the use of, or the right to use, industrial, commercial or scientific equipment (Art. 12(3) of the Agreement);
-   the provision, that capital gains derived by a resident of a contracting state from the shares of a company deriving more than 50% of its asset value directly or indirectly from immovable property situated in the other contracting state may be taxed in that other state, does not apply to gains derived from the alienation of shares quoted on a stock exchange of any of the contracting states or on any other stock exchange agreed by the states; (Art. 13(4) of the Agreement);
-   capital gains from the alienation of shares, participations or other rights, which directly or indirectly entitle the owner of such shares, participations or rights to the enjoyment of immovable property situated in a state, may be taxed in that state (Art. 14(5) of the Agreement); and
-   the agreement does not contain a provision concerning the assistance in the collection of taxes.

Both states provide for the credit method to avoid double taxation. In addition, subject to Spanish domestic law, Spain grants an underlying tax credit in respect of dividends paid by a company resident in Hong Kong to a company resident in Spain (Art. 21(2)(a)(ii)). If the income derived by a resident of Spain is, under the Agreement, exempt from tax, Spain may nevertheless take into account the exempt income in calculating the amount of tax on the remaining income of such resident (exemption-with-progression) (Art. 21(2)(b)).

Under the protocol, a limitation of benefits clause is introduced according to which Arts. 10 (Dividends), 11 (Interest), 12 (Royalties), 13 (Capital gains) and 20 (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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