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Double tax treaty between Russian Federation and Hong Kong was ratified

Federal law dated 03.07.2016 No. 234-FZ ratified  the Treaty between the Governments of the Russian Federation and the Hong Kong Special Administrative Region of the People's Republic of China “On the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income” (hereinafter – the “Treaty”).

The Treaty is based on the OECD Model Convention on avoidance of double taxation with respect to taxes on income and capital. The Treaty is a tax agreement which distributes income taxation rights between the two jurisdictions and assists investors in better estimation of potential tax obligations arising when conducting business operations. The Treaty provides for possibility of tax crediting in respect of corporate income tax and personal income tax paid in one of the contracting jurisdictions in case respective tax was paid in another jurisdiction.

The Treaty applies to Russian corporate income tax and personal income tax; in Hong Kong – to income tax, tax on salary and property tax. The exchange of tax information also covers income taxes, VAT, property tax, and individuals (for Russian Federation). Under the Treaty Hong Kong companies with offshore status can not go for the stipulated tax benefits.

In order to apply for the advantages provided for in the Treaty it is necessary to confirm tax residence. Definition of tax residence is made similarly to the adopted in the international practice i,e. for individuals – staying 183 days during a period of 12 months on the territory of the country.

The Treaty provides for the following withholding tax rates:

  • 3% for royalty income;
  • preferential 5% rate for dividends in case dividend recipient is a company (other than a partnership) which owns not less than 15% of the capital of the company, paying the dividends, and general 10% rate for rest of the cases.

Interest income taxes paid from one contracting state into another shall be settled in the state of residence of the interest income recipient.

The Treaty establishes that taxation of income arising from entrepreneurial activities in one of the contracting states is performed in another state if the person conducts activities in said other state through a permanent establishment. And the income shall be subject to taxation in the part relating to the said permanent establishment.

The Treaty also contains provisions on information exchange allowing Hong Kong implement its international obligations on increasing level of tax transparency.

Income arising from disposal of shares of Hong Kong company more than 50% of which consists of the property on the territory of Russia, can be taxed in Russia apart for some exceptions.

It is worth mentioning, that the double tax treaty between the Russian Federation and China is slightly different in particular pertaining to dividend and interest taxation. For more detailed information kindly refer to our earlier published material at the following link.

We will monitor further enactment of the Treaty, which will apply to the Russian taxes for reporting periods starting from 01 January of the year, following the year of the Treaty enactment.

The Treaty is aimed at increasing investment prospects of the Russian Federation for foreign investors including those registered in Hong Kong jurisdiction.

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