Hong Kong and South Korea Sign Double Tax Agreement

July 10, 2014 Posted by China Briefing Reading Time: 3 minutes

HONG KONG – Professor K. C. Chan, Hong Kong’s Secretary for Financial Services and the Treasury, and Cho Yong-chun, the South Korean Consul-General in Hong Kong, signed a comprehensive double taxation agreement (CDTA) on behalf of their respective jurisdictions on July 8th. Chan described the DTA as clearly delineating taxation rights between the two jurisdictions and motivated by a desire to clarify potential tax liabilities incurred by investors’ cross-border economic activities. The agreement is expected to provide added incentives for South Korean companies to do business or invest in Hong Kong, and vice versa.

Previously, income earned by South Korean residents in Hong Kong was subject to income tax in both jurisdictions. Under the new agreement, however, tax paid in Hong Kong will be deductible from tax payable in South Korea. Similarly, whereas the profits of Hong Kong companies with permanent establishment in South Korea were also subject to double taxation if the income was deemed Hong Kong sourced, the DTA newly stipulates that any South Korean tax paid by companies will be allowed as a credit against income tax payable in Hong Kong.

Currently, interest received in South Korea by Hong Kong residents is subject to Korean withholding tax, which ranges from 14 percent to 20 percent. Under the DTA, however, this will be capped at 10 percent. A similar cap of 10 percent will also be applied to South Korean withholding tax on royalties (currently 20 percent). Lastly, the South Korean dividends withholding tax on Hong Kong residents will be reduced according to the percentage of shareholdings, from 20 percent at present to 15 percent or 10 percent.

Airlines are included as a specific category in the agreement, which stipulates that Hong Kong airlines operating flights to South Korea are only to be taxed at Hong Kong’s corporate tax rate. This is good news for Hong Kong airline operators, as the territory’s own tax rate is generally lower than that of South Korea. South Korean taxes will also be newly waived on international shipping transport profits incurred in South Korea by Hong Kong residents. Additionally, the DTA incorporates international standards for the exchange of tax-related information.

Chris Devonshire-Ellis of Dezan Shira & Associates comments, “There are many assumptions that Hong Kong is automatically covered as part of any DTA or FTA that mainland China has entered into. This is not the case—tax counsels need to evaluate Hong Kong apart from China when it comes to assessing tax structures. Recent moves by Hong Kong to upgrade its tax relations with its neighbors in Asia are a welcome development.”

The Hong Kong-South Korea DTA will come into force once the two parties have completed their respective ratification procedures. This is the 30th DTA that Hong Kong has concluded with its trading partners, and official plans have been announced to continue expanding its treaty network both regionally and beyond. A full list of Hong Kong’s DTAs can be found here.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email hongkong@dezshira.com or visit www.dezshira.com.

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