India and the Hong Kong Special Administrative Region have signed a comprehensive agreement for the avoidance of double taxation (DTA) on March 19, 2018 after a lengthy negotiation process. The DTA will come into force upon completion of ratification procedures by both jurisdictions.
India imposes corporate income tax on worldwide income of companies resident in India while there is a tax relief mechanism for foreign income. For those deriving income from Hong Kong, the India-Hong Kong DTA will help avoid double taxation by giving clarity as to the allocation of taxing right between India and Hong Kong.
For Hong Kong companies that are subject to Indian withholding taxes on transactions with their counterparties in India, the India-Hong Kong DTA provides tax relief mechanism for them to claim tax credit in Hong Kong on the Indian withholding tax paid, if qualified to do so. This will ease the double taxation issue currently suffered since tax credit against Hong Kong profits tax is only granted under a DTA.
Apart from providing double taxation relief, the India-Hong Kong DTA sets out ceilings for withholding tax rates for various types of income. Hong Kong investors may benefit from a lower Indian interest withholding tax rate of 10 % under the DTA as the Indian interest withholding tax rate is generally 20% in the absence of a DTA.
The DTA is certainly a good news to Indian companies and businesses that have a presence in Hong Kong as well as to Hong Kong-based companies providing services in India. We believe that the DTA will also stimulate flow of investment, technology and personnel between India and Hong Kong.