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France; Hong Kong

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Treaty between Hong Kong and France – details

Details of the income and capital tax treaty between Hong Kong and France and its additional protocol, both signed on 21 October 2010, have become available. The treaty was concluded in the English and French languages, each text having equal authenticity. The treaty generally follows the OECD Model Convention.

The maximum rates of withholding tax are:

-   10% on dividends;
-   10% on interest, subject to exceptions including an exemption for interest paid (i) to the government of a contracting state, and (ii) to financial establishments appointed by the governments of the contracting states;
-   10% on royalties;
-   for managerial services, there are no provisions;
-   for technical services, as well as payment for the right to distribute software, Art. 8 of the protocol specifies that they are commercial profits, not royalties;

Deviations from the OECD Model include that:

-   Art. 5 (2)(g) contains a provision corresponding to the UN Model Convention (2001), whereby a building site constitutes a PE when such sites exist for a period of more than 6 months; and
-   Art. 5(3) contains a deemed PE provision, whereby supervisory activities in connection with a building site, or the furnishing of services (including consultancy services), constitute a PE when such activities are carried on for a period of more than 6 months;
-   Art. 5(6) excludes from the PE definition agents of an independent status (e.g. brokers, general commission agents) provided that their activities are not devoted wholly or almost wholly on behalf of the other enterprise;
-   Art. 7(3) specifies that in the determination of the profits of a PE, the following payments made by the PE to the head office should not be deducted: royalties, commission for specific services performed or for management, and interest (except for financial institutions);
-   Art. 10(6), 11(8), 12(7) and 13(6) contain a similar anti-abuse provision which excludes from the benefit of the treaty any arrangement the main purpose of which is to take advantage from a lower withholding tax rate (or exemption, in case of capital gains);
-   Art. 13(3), Art. 17(1) and Art. 20(3) grant taxing rights to the source state on, respectively, (i) capital gains derived from the alienation of shares forming part of a substantial participation in a company resident of that state, (ii) pension income, and (iii) other income;
-   Art. 1 of the protocol excludes from the benefit of the treaty any resident of a contracting state that (i) carries on business in a tax-free zone situated in that contracting state, or (ii) enjoys an offshore tax treatment in that contracting state; and
-   Art. 12 of the protocol provides that where the application of the treaty gives rise to a double exemption because of a mismatch between the domestic laws of the contracting states (i.e. conflict of qualification), each of the contracting states shall keep the right to tax its residents on the income at issue.

Hong-Kong generally provides for the ordinary credit method to avoid double taxation.

France provides for the ordinary credit method to avoid double taxation only in respect of certain income listed under Art. 22(1)(a)(ii) (e.g. dividends, interest, royalties, capital gains, director's fees, artistes and athletes). For other income, France provides for a credit equal to the French tax attributable to such income, thereby effectively using the exemption-with-progression method.

The treaty does not provide for any assistance in the collection of taxes.

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