Hong Kong signed a comprehensive double taxation agreement (“DTA”) with India on 19 March 2018 (Agreement India-Hongkng (PDF 329 KB)). The DTA will enter into force when both jurisdictions have completed their formal ratification procedures.
Apart from providing for the usual reductions in dividend (see below) and interest withholding tax as well as exemptions for certain employment income, the article which will be of most interest to many investors is the capital gains article.
Regretfully, the DTA does not confer any specific exemption for most capital gains on Hong Kong residents investing in India. Such gains will continue to be taxed in accordance with Indian domestic tax law.
To this extent, the HK – India DTA compares unfavourably with the benefits provided to Singapore investors under the Singapore – India DTA.
While the dividend withholding tax is reduced to 5% under the DTA, any dividends paid or distributed by Indian companies are still subject to dividend distribution tax (DDT) at 15% plus surcharge and education cess which is levied on the paying company itself. As such, the reduction in dividend withholding tax under the DTA does not provide any real benefit.
The extended day threshold for exemption from India tax for Hong Kong tax residents is welcome – up to 183 days in any 12-month period under the DTA.
The DTA may benefit short-term secondees and business travellers exceeding 90 days in India in a tax year and who would otherwise have been taxable. Such employees can now visit India for up to 183 days in any 12-month period, provided their costs are not borne in India.
Care still needs to be taken with employees visiting India as the benefit of the employment income article may be lost if the employee is considered to be working for an Indian entity under the economic employer concept which India applies, their costs are borne by an Indian entity, or if the employee is working on a project (or one of several connected projects) that continue for more than 183 days within a 12-month period.
In some circumstances, the DTA may also relieve India tax on trailing bonus payments in respect of income earned or partially earned whilst employed in India and paid after the employee moves to Hong Kong.
The signing of the HK – India DTA has been highly anticipated and is a welcome addition to Hong Kong’s tax treaty network. Overall, it should provide foreign investors, mobile employees and employers with greater tax certainty on the Indian tax treatment of certain income. However, the limited exemption from Indian tax on capital gains is regrettable.
For more information and assistance, please contact your usual tax advisor or one of our tax advisors.