Hong Kong and Portugal ink tax agreement

Investors and tourists of both parties to pay lower taxes and transport fees under the pact.

Hong Kong and Portugal have signed an agreement on the avoidance of double taxation and the prevention of income tax evasion.

Secretary for Financial Services & the Treasury KC Chan signed the agreement with Portuguese Consul-General Manuel Carvalho on Tuesday.

The agreement states the allocation of taxing rights between the two jurisdictions and the relief on tax rates on different types of passive income, according to a government report.

Investment boon
It will help investors better assess their potential tax liabilities from cross-border economic activities, foster closer economic and trade links between the two places, and provide added incentives for companies in Portugal to do business or invest in Hong Kong, and vice-versa.

In the absence of this agreement, Hong Kong residents receiving dividends from Portugal not attributable to a permanent establishment in the country are subject to the Portuguese withholding tax, which is currently at 20% and 21.5% for corporations and individuals.

Under the agreement, the rate is cut to 10%. The withholding tax on dividends will be further reduced to 5% if the beneficial owner of the dividends is a company (other than a partnership) holding directly at least 10% of the capital of the company paying the dividends.

The Portuguese withholding tax on interest, currently at 20% and 21.5% for corporations and individuals on Hong Kong residents will be capped at 10%. The Portuguese withholding tax on royalties, currently at 15% and 21.5% for corporations and individuals will be capped at 5%.

Transport benefits
Hong Kong airlines operating flights to Portugal will be taxed at Hong Kong's corporation tax rate, which is lower than that of Portugal.

Profits from international shipping transport earned by Hong Kong residents that arise in Portugal, which are currently subject to tax there, will not be taxed.

The agreement will come into force after the completion of ratification procedures on both sides. In the case of Hong Kong, an order must be made by the Chief Executive in Council under the Inland Revenue Ordinance. The order is subject to negative vetting by the Legislative Council.

This is the 19th comprehensive agreement for the avoidance of double taxation concluded by Hong Kong with its trading partners. So far Hong Kong has reached 27 avoidance of double taxation agreements on airline income, six agreements on shipping income and two agreements on airline and shipping income with other trading partners.