Client Alert: Double Taxation Agreement with Hong KongJuly 15, 2019
In June 2019, the Royal Government of Cambodia announced that a double taxation agreement (“DTA”) was signed with the Government of Hong Kong Special Administrative Region of the People’s Republic of China (“Hong Kong”), bringing the number of DTAs signed by Cambodia to seven.
A summary of the significant features of the seven DTAs is as follows:
|Withholding tax rates on:|
|Technical service fees||14%||10%||10%||10%||10%||10%||10%|
|Permanent Establishment time test:|
|Building Site||183 days||9 months||6 months|
|Project services||183 days||–||183 days||183 days||183 days||183 days||183 days|
*If the recipient is a financial institution
The Hong Kong DTA contains provisions that are similar to the other DTAs, as follows:
- Hong Kong-based airlines, incorporated and taxed in Hong Kong, which operate flights to and from Cambodia will be taxed in Hong Kong only.
- Hong Kong-based international shipping companies, incorporated and taxed in Hong Kong, will be taxed in Cambodia, but will receive a 50% reduction in the tax that would otherwise be due.
- The definition of permanent establishment (“PE”) does not include the use of facilities or maintenance of stock belonging to an enterprise solely for the purpose of storage or display or collecting information.
- A Hong Kong company that has a PE in Cambodia will be taxed in Cambodia, but only on the profits attributable to that PE. The DTA does not specify how to allocate profits attributable to a PE. Therefore, if your company has a PE issue, it’s advisable to consult with us for specific practical methods to fairly allocate the profits attributable to the PE.
How is Hong Kong defined under the DTA?
The previous DTA with China does not apply to Hong Kong or Macau, as each of these territories have their own tax systems, and are not covered by the taxation laws of the People’s Republic of China.
For the purpose of this DTA, Hong Kong is defined as any place where the tax laws of the Hong Kong Special Administrative Region of the People’s Republic of China apply.
How does a taxpayer apply for DTA relief?
DTA relief is not automatic. Under Instruction 4084 issued in March 2018, taxpayers wishing to apply reduced rates of withholding tax under a DTA are required to submit an application to the General Department of Taxation (“GDT”). The application must be supported by documentary evidence of the offshore party’s tax residency status, and the transaction for which the reduced rate is considered applicable.
Generally, DTA relief is not granted if the company is set up purely to take advantage of the DTA without any real economic activity performed in the Contracting State. Various rules, such as limitation of benefits rules, dividend stripping rules, and anti-conduit rules, have been established to determine the beneficial ownership of the payment. It is advisable that you consult with your VDB Loi tax adviser to review your company’s beneficiary owner status before proceeding with your application.
When does the Hong Kong DTA become effective?
The DTA with Hong Kong (also Indonesia) will come into force after the completion of ratification procedures by the respective countries. These are expected to be completed and the DTA to become effective from January 2020.
What should I do now?
Companies having existing transactions with Hong Kong companies are invited to consult with us right away as to what steps they should be taking now so that they would be able to enjoy the DTA relief benefits immediately after the Cambodia-Hong Kong DTA becomes effective without facing unnecessary delay.
If you have questions about this alert, need help understanding a DTA, or require assistance with submitting an application to the GDT to utilize a DTA, please contact the undersigned, or your usual VDB Loi adviser.
VDB Loi is a network of leading law and tax advisory firms with offices in Cambodia, Indonesia, Laos, Myanmar and Vietnam. We provide the highest quality solutions for transactions and taxation. Our general areas of practice are corporate, finance, licensing and disputes. Our principal specialized areas of practice are energy, infrastructure, real estate and construction, telecom, and taxation.
You can find more information on our Cambodia office here.
- Notification No. 5735 GDT dated 16 February 2023 issued by the General Department of Taxation on “Annual Tax on Income Filing for 2022”
- February 27, 2023
- Notification No. 5367 GDT dated 14 February 2023 issued by the General Department of Taxation on “2022 Market Interest Rates for Loans”
- February 20, 2023
- Instruction No. 26118 GDT dated 28 October 2022 issued by the General Department of Taxation on “The Use of Exchange Rates for Self-Assessment Taxpayers”
- November 30, 2022
- Instruction No. 27185 GDT dated 14 November 2022 issued by the General Department of Taxation on “The hanging or displaying of the tax registration documents at the business premises”
- November 30, 2022
- Pension fund
- October 24, 2022