On 10th November 2017, the Union Cabinet chaired by the Prime Minister Shri Narendra Modi gave its approval for entering into a Double Taxation Avoidance Agreement (DTAA) with Hong Kong.
DTAA aims to avoid and reduce the burden of double taxation on the same tax payer in two countries in order to promote international trade and investments between the two jurisdictions. The conclusion of DTAA with Hong Kong would reduce the withholding tax rates that can be applied to interest or royalties or FTS (which can be as high as 40% in certain cases in the absence of DTAA). It will also provide a fair and certain tax environment for business activities by way of an Article on Permanent Establishment (currently the broad concept of ‘Business Connection’ under the Income-tax Act, 1961 is being applied) and Article on Dependent Personal Service.
This will allow Hong Kong investors to make investment decisions with greater certainty and reduces compliance costs for businesses. Hong Kong is a significant international finance centre, and Hong Kong also has a territorial-based tax system. These features coupled with the presence of a DTAA with India are expected to make Hong Kong a favoured location for Indian investor to establish companies. Notably, Hong Kong has a tax treaty network of 38 tax treaties which include China, the UK, France, Switzerland, Japan, Belgium, UAE, Luxembourg, etc.
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