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December 13, 2022
2022-1870

Hong Kong and Mauritius sign comprehensive double taxation arrangement

  • Hong Kong and Mauritius signed a comprehensive double taxation arrangement (CDTA) on 7 November 2022.
  • The CDTA is largely based on the 2017 version of the Organisation for Economic Co-operation and Development Model Tax Convention (OECD MTC).
  • The CDTA will become effective in Hong Kong for tax years beginning 1 April 2023.

Executive summary

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.

Detailed discussion

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:

 Income streams

Tax rate

Interest

Royalties

Normal withholding rate in Hong Kong

0%

Generally 4.95%

Normal withholding rate in Mauritius

15%1

15%2

Reduced rate under the CDTA

Generally 5%

5%

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:

  • An introductory statement or preamble specifying that the CDTA is intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
  • The principal purpose test (PPT) provisions whereby the granting of tax benefits under the CDTA would be denied if it is reasonable to conclude, considering all relevant facts and circumstances, that obtaining the benefits was one of the principal purposes of any arrangement or transaction. The PPT would not however apply where it is established that granting the tax benefits in the circumstances would be in accordance with the objective and purpose of the relevant provisions of the CDTA.

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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

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ENDNOTES

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.

 

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