May

Canada starts tax treaty negotiations with Hong Kong

Posted By: Vitaly Timokhov on May 20, 2011 at 5:01:43 in All , News

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Canada starts tax treaty negotiations with Hong Kong

Canada just announced that it will soon commence tax treaty negotiations with Hong Kong.  There is indeed a tax treaty  (or tax convention) in place with China, which however specifically excludes Hong Kong.  As such, any resident in Hong Kong, including business corporations or individuals, are not entitled to the benefits of the Canada-China Tax Convention.  Generally, Canadian investments in Hong Kong are accommodated through intermediary entities positioned in the jurisdictions with a tax treaty already in place.  The new tax treaty will accommodate financial flows between Canada and Hong Kong (and by extension, given the special role of Hong Kong in Chinese economy, between Canada and China).  Canadian investors into the Chinese economy may also benefit from establishing presence in Hong Kong, one of the largest financial centres in the world with a direct access to the Chinese economy.

Notably, the public notice also suggests that certain changes may be brought to the Canada-China Tax Treaty, too. The Canada-China Tax Treaty presently in force was negotiated back in mid-80s and entered in force on December 29, 1986.  It was a different country then!

Given then increasing role of China as both the capital/goods exporter to and importer from Canada, it will be interesting to see the contents of the new tax treaty (or treaties if both treaties are negotiated at the same time), which has to recognize Canada’s role as a bulk purchaser of manufactured goods from China and an investment target for resource-hungry Chinese manufacturing sector.  For example, will Canada extend, as part of its newly found tax vision, a no-withholding tax regime on related party interest payments?

The following is an excerpt from the formal announcement published by the Department of Finance.

 

TAX TREATY NEGOTIATIONS WITH THE GOVERNMENT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION OF THE PEOPLE’S REPUBLIC OF CHINA

Negotiations for an income tax treaty between the Government of Canada and the Government of the Hong Kong Special Administrative Region of the People’s Republic of China will commence the week of June 27, 2011, in Ottawa.

The purpose of this bulletin is to ensure that persons whose interests are affected have an opportunity to inform the government of any particular issues of double taxation that might be taken into account during the course of negotiations. The government is particularly interested in learning of any difficulties that might be encountered by Canadians under the tax system of the Hong Kong Special Administrative Region of the People’s Republic of China.

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Vitaly Timokhov is a member of TaxChambers LLP, an association of Canadian tax lawyers and advisors.  Our tax lawyers have taught at Canadian law schools and have authored articles published in a wide variety of legal and industry journals and publications, as well as a leading treatise on Canadian International and Cross-border taxation.  Our tax lawyers have also been invited to present at international and domestic tax conferences.

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