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September 19, 2023
2023-1557

Hong Kong and Bangladesh sign comprehensive double taxation arrangement

  • Hong Kong signed a comprehensive double taxation arrangement (CDTA) with Bangladesh on 30 August 2023, largely based on the 2017 version of the Organisation for Economic Co-operation and Development Model Tax Convention.
  • The CDTA will become effective in Hong Kong for tax years beginning 1 April 2024.

Executive summary

On 30 August 2023, Hong Kong signed a CDTA with Bangladesh that will become effective in Hong Kong for tax years beginning 1 April 2024 if the ratification procedures can be completed in 2023.

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 and normally managed or controlled in Hong Kong. The "tie-breaker" rule for dual-resident companies considers where the company's 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. 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.

Business Profits (Article 7)

Article 7 of the CDTA restricts deductibility of expenses payable by the PE to a head office in the form of royalties, fees or commissions, among others. The CDTA also contains the exclusion for purchasing activity.

Taxation of Dividends (Article 10), Interest (Article 11), Royalties (Article 12), Technical Services Fees (Article 13) and Capital Gains (Article 14)

Passive streams of income like dividends, interest, royalties, technical services fees and capital gains are generally taxable in the resident jurisdiction. Such income may also be taxed in the source jurisdiction at the reduced withholding rates summarized below:

Income streams

Dividends

Interest

Royalties

Capital gains on disposal of shares

Fees for technical services

Tax rate

Normal withholding rate in Hong Kong

0%

0%

Generally 4.95%

0%

0%

Normal withholding rate in Bangladesh

20%

20%

20%

15%

20%

Reduced rate under the CDTA

10/15%1

10%2

10%

0%3

10%

The CDTA also provides tax relief for Hong Kong residents deriving profits from international shipping transport in Bangladesh. They will enjoy 50% tax reduction in Bangladesh in respect of the profits subject to tax there.

Elimination of Double Taxation (Article 24)

To eliminate double taxation on a person, both jurisdictions allow a foreign tax credit against for jurisdictional taxes paid in the other jurisdiction.4

Prevention of treaty abuse

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 an arrangement or transaction; however the PPT would not apply if it is established that granting the tax benefits would be in accordance with the object 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

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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ENDNOTES

1 A beneficial owner who is a resident of the other Contracting Party and holds directly at least 10% of the capital of the company paying the dividends would be subject to tax at 10% of the gross amount of the dividends. In all other cases, the person would be subject to tax at 15% of the gross amount of the dividends.

2 Exempt if the interest is paid to the HKSAR Government, Hong Kong Monetary Authority, the Exchange Fund or any entity wholly or mainly owned by the HKSAR Government as may be agreed from time to time between the competent authorities of the Contracting Parties. It is also exempt if the interest is paid to the Bangladesh Government, the Bangladesh Bank, the Investment Corporation of Bangladesh or any entity wholly owned by the Bangladesh Government as may be agreed from time to time between the competent authorities of the Contracting Parties.

3 Gains derived by a Hong Kong resident from the alienation of shares of a company in Bangladesh deriving more than 50% of its asset value directly or indirectly from immovable property situated in Bangladesh would be subject to tax in Bangladesh.

4 Under Hong Kong's domestic law, the amount of a tax credit is limited to the Hong Kong profits tax payable in respect of the same income.

 

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