December 13, 2022
Hong Kong and Mauritius sign comprehensive double taxation arrangement
On 7 November 2022, Hong Kong signed the CDTA with Mauritius which will become effective in Hong Kong for tax years beginning 1 April 2023 if the ratification procedures can be completed in 2022.
This Alert summarizes the key provisions of the CDTA.
Resident (Article 4)
A company is a Hong Kong tax resident if it is incorporated in Hong Kong or if incorporated outside Hong Kong, being normally managed or controlled in Hong Kong. The tie-breaker rule for dual resident companies is where its place of effective management is situated.
Permanent Establishment (Article 5)
In addition to a fixed place permanent establishment (PE), the CDTA covers other forms of PE such as Construction PE, Service PE and Agency PE. The fixed place PE includes a warehouse in relation to a person providing storage facilities for usage by others.
Certain activities are listed as exempt from creating a PE such as using facilities for storage, display or maintenance of stock of the enterprise's own goods, processing, purchasing goods or merchandise, or collecting information, and other preparatory or auxiliary activities. The anti-fragmentation rule is absent in the CDTA.
Business Profits (Article 7)
Article 7 of the CDTA generally follows Article 7 of the 2021 version of the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model Treaty). However, the CDTA does not restrict deductibility of expenses payable to a head office in the form of royalties, fees, or commissions, among others. The CDTA also contains the exclusion for purchasing activity, which is not present in the UN Model Treaty or the OECD MTC.
Taxation of Dividends (Article 10), Interest (Article 11), Royalties (Article 12) and Capital Gains (Article 13)
Passive streams of income like dividends, interest and royalties are generally taxable in the resident jurisdiction. While currently neither Hong Kong nor Mauritius imposes withholding tax on dividends or capital gains on disposal of shares, the interest and royalty income may be taxed in the source jurisdiction at the withholding rates summarized below:
Elimination of Double Taxation (Article 23)
To eliminate double taxation on a person, both jurisdictions allow a foreign tax credit against its jurisdictional tax for the taxes paid in the other jurisdiction.3
Prevention of treaty abuse provisions
The CDTA contains the following specific provisions against treaty abuse:
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Services Limited, Hong Kong
Ernst & Young LLP (United States), Hong Kong Tax Desk, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago
1 Exempt if the nonresident does not carry on any business in Mauritius and such interest is paid by either an entity that holds a Global Business License (GBL) under the Financial Services Act (FSA) out of its foreign source income or a bank holding a banking license under the Banking Act insofar as the interest is paid out of its gross income from banking transactions with nonresidents and entities holding a GBL under the FSA.
2 Exempt under the Mauritian tax laws if it is paid out of the foreign source income of a company.
3 Under Hong Kong's domestic law, the amount of tax credit is limited to the Hong Kong profits tax payable in respect of the same income.