Hong Kong Inland Revenue has announced the entry into force of the income and capital tax treaty with Serbia on 30 December 2020. The treaty, signed by Serbia on 14 August 2020 and by Hong Kong on 27 August 2020, is the first of its kind between the two jurisdictions.

Taxes Covered

The treaty covers Hong Kong profits tax, salaries tax, and property tax and covers Serbia corporate income tax, personal income tax, and the tax on capital.

Residence

If a person, other than an individual, is considered resident in both Contracting Parties, the competent authorities will determine the person's residence for the purpose of the arrangement through mutual agreement, having regard to its place of effective management, the place where it is incorporated or otherwise constituted, and any other relevant factors. If no agreement is reached, such person shall not be entitled to any relief or exemption from tax provided by the arrangement, except to the extent and in such manner as may be agreed upon by the competent authorities of both Contracting Parties.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services through employees or other engaged personnel if the activities continue for the same or connected project within a Contracting Party for a period or periods aggregating more than 183 days within any 12-month period.

Withholding Tax Rates

• Dividends - 5% if the beneficial owner is a company that directly holds at least 25% of the paying company's capital for a period of at least 365 days that includes the day of the payment of the dividends; otherwise, 10%
• Interest - 10%
• Royalties - 5% for royalties paid for the use of, or the right to use, any copyright of literary, artistic, or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting; otherwise, 10%

Capital Gains

The following capital gains derived by a resident of one Contracting Party may be taxed by the other Party:

• Gains from the alienation of immovable property situated in the other Party;
• Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other Party; and
• Gains from the alienation of shares or comparable interests of any kind if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived at least 50% of their value directly or indirectly from immovable property situated in the other Party.

Gains from the alienation of other property by a resident of a Contracting Party may only be taxed by that Party.

Double Taxation Relief

Both jurisdictions apply the credit method for the elimination of double taxation. A provision is also included for a tax sparing credit for tax that is otherwise payable in a Contracting Party, but which has been reduced or waived under the legal provisions of that Party for tax incentives. The sparing credit provision will apply for 5 years from the first taxable period or fiscal year the treaty is effective but may be extended.

Entitlement to Benefits

Article 28 (Entitlement to Benefits) provides that a benefit under the arrangement shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the arrangement.

Effective Date

The treaty applies in Hong Kong from 1 April 2021 and in Serbia from 1 January 2021.