Hong Kong and Spain inks tax deal

The 19% Spanish withholding tax on interest and 24% withholding tax on royalties on Hong Kong residents will both be slashed down to 5%.

Chief Secretary Henry Tang on Friday signed an agreement with Spanish Second Vice-President Elena Salgado for the avoidance of double taxation and the prevention of tax evasion.

It was Hong Kong's 20th avoidance of double taxation agreement, according to a government report.

The deal outlines the allocation of taxing rights between the two jurisdictions and the relief on tax rates on different types of passive income. The agreement will help investors better assess their potential tax liabilities from cross-border economic activities.

Hong Kong residents receiving dividends from Spain not attributable to a permanent establishment in the country are subject to the Spanish withholding tax, set at 20%. Under the agreement, the withholding tax will be capped at 10%.

The dividends withholding tax will be further reduced to 0% if the beneficial owner of the dividends is a company (other than a partnership) holding directly at least 25% of the capital of the company paying the dividends.

The Spanish withholding tax on interest, currently at 19%, on Hong Kong residents will be capped at 5%. The Spanish withholding tax on royalties, currently at 24%, will also be capped at 5%.

Branch Profits Tax on after-tax profits remitted by a Spanish permanent establishment to its foreign head office will cease to apply to Hong Kong residents.

Hong Kong airlines operating flights to Spain will be taxed at Hong Kong's corporation tax rate which is lower than Spain's. Profits from international shipping transport earned by Hong Kong residents that arise in Spain, which are currently subject to tax there, will not be taxed in the country.

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.