22 March 2010

On 22 March 2010, the Secretary for Financial Services and the Treasury of Hong Kong, Professor K C Chan, and the Minister of Finance of the Netherlands, Mr J C de Jager, signed a comprehensive agreement for avoidance of double taxation (CDTA) between the Hong Kong Special Administrative Region and the Kingdom of the Netherlands.

The CDTA applies to taxes on income and intends to avoid double taxation as well as to prevent tax evasion.

Both Mr De Jager and Professor Chan underlined that the signing of the CDTA will contribute to the expansion of mutual investments and the strengthening of the economic relations between the Netherlands and Hong Kong.

Under the CDTA, withholding tax rates on passive income including dividends and royalties will be lowered. A withholding tax rate of 0%, instead of the 15% rate currently applicable in the Netherlands in absence of a CDTA, applies to dividends received by qualifying persons holding at least 10% of the share capital of the paying companies, as well as dividends received by banks and insurance companies, pension funds, headquarters companies and certain other qualifying entities.

To other dividends, a withholding tax rate of 10% will apply. No source taxation will apply to interest payments, as there is no withholding tax for such payments in either party. For royalties, Hong Kong has agreed to limit its withholding tax to 3%.

Furthermore, the CDTA contains a provision on exchange of information relating to tax matters,according to the OECD standard. It offers an opportunity for the tax authorities of Hong Kong and the Netherlands to consult each other in order to resolve disputes on the application or interpretation of the CDTA. Furthermore, under the CDTA, taxpayers could request an arbitration  procedure.

After the publication of the CDTA, by means of an Exchange of Notes, the Hong Kong Special Administrative Region and the Kingdom of the Netherlands have agreed upon replacing paragraph 3 of Article 10. The amended text clarifies that also bank and insurance companies, as well as international headquarters companies can only be entitled to the withholding tax rate for participation dividends of 0%, if they hold at least 10% of the share capital of the company paying the dividends. As the adjusted text of paragraph 3 of Article 10 of the Agreement implies that a few references in Article VII of the Protocol to the Agreement have become incorrect, the latter article has been adjusted also.

Furthermore, the drafting of paragraph 3 of Article 5 of the Agreement and paragraph 3, subparagraph b, of Article VII of the Protocol to the Agreement has been improved. The amended complete treaty text has been published in Trb. 2010, 198.

The CDTA needs to be ratified in the Netherlands and Hong Kong before it can enter into force.

Ton Smit

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Email:   ton.smit@taxci.nl

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