Hong Kong completes its 25th DTA and its first with a Latin American country
In June Hong Kong signed a comprehensive double taxation agreement (‘DTA’) with Mexico that will enter into force after the ratification procedures are completed by both parties. When ratified the DTA will allocate taxing rights between Hong Kong and Mexico and will end the present position where Mexican individuals who are resident in Hong Kong, are subject to income tax in both Hong Kong and Mexico. This is the 25th comprehensive DTA that Hong Kong has concluded with its trading partners.
It is intended that the DTA will provide greater certainty to individuals on their tax liabilities on cross-border commercial activities so increasing trade and investment between the two countries and increasing the strength of the bilateral relationship.
The Hong Kong taxes covered by the DTA are profits tax, salaries tax and property tax and will take effect for any year of assessment on or after 1 April in the year after the Treaty enters into force.
Currently individuals resident in Hong Kong who receive interest payments from Mexico will be subject to Mexican withholding tax, which is, in broad terms levied at the rate of 30%. Under the DTA, the withholding tax will be capped at 10% and if the beneficial owner is a bank which is receiving interest the withholding tax will be reduced to 4.9%.
The Mexican withholding tax on royalties will also be capped at 10%, a significant reduction from its current level of 25%.
Hong Kong Companies with Permanent Establishment in Mexico
At present, the profits of Hong Kong companies doing business in Mexico through a permanent establishment in that jurisdiction could be subject to double taxation in both Hong Kong and Mexico if the income is Hong Kong sourced. The provisions of the DTA, will avoid the double taxation with any tax paid in Mexico being allowed as a tax credit against the tax payable in Hong Kong. This will apply in respect of the income and will also be subject to the provisions of Hong Kong’s tax laws.
Taxation of Aviation and Shipping
Hong Kong airlines flying to Mexico will enjoy the benefits of the DTA. Such airlines will not be subject to tax in Mexico, but will be subject to corporation tax in Hong Kong, which is currently lower than Mexico’s corporation tax.
Hong Kong residents who earn profits arising in Mexico from international shipping transport are, at present, subject to Mexican tax on those profits. Following the DTA such profits will not be taxed in Mexico.
Exchange of information
This comprehensive DTA between Hong Kong and Mexico incorporates the latest OECD standard on the exchange of information between jurisdictions.
The DTA will come into effect once ratified by both countries. The procedure to be followed by Hong Kong requires an order by the Chief Executive Council under the IR Ordinance which is then subject to vetting by the Legislative Council.
Extending its DTA network
It is the policy of Hong Kong to establish a CDTA network that would minimize exposure of Hong Kong residents and residents of the CDTA partner to double taxation. Hong Kong has actively engaged its trading partners in negotiating a CDTA (covering various types of income) and recognizes that there are merits in concluding CDTAs with its trading partners.
Hong Kong is actively seeking to expand its global network of DTA’s with its major trading and investment partners. Where it is unable to pursue discussions on comprehensive DTA’s with some countries, it will seek to negotiate DTA’s limited to the taxation of income from airline and shipping activities. To date 27 DTA’s limited to airline income and 6 DTA’s on shipping income have been concluded.
The network of comprehensive DTA’s have strengthened Hong Kong position as an economic hub of Southeast Asia and have helped break down the tax barriers that obstruct the cross-border flow of trade, investment, technical know-how and expertise between Hong Kong and the rest of the world.
The text of the CDTA between Hong Kong and Mexico can be found on the website of the Hong Kong Department of Inland Revenue at -
Hong Kong and Mexico sign Double Taxation Agreement