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Vietnam-Hong Kong

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Treaty between Vietnam and Hong Kong signed – details

Details of the first-time income tax treaty and protocol between Vietnam and Hong Kong, signed on 16 December 2008, have become available. The treaty was concluded in Vietnamese and English, each text having equal authenticity. The Treaty generally follows the UN Model Convention (2001).

The maximum rates of withholding tax are:

-   10% on dividends;

-   10% on interest. Interest shall be exempt when paid to certain specified Government/Government-owned or appointed financial entities; and
-   7% on royalties made for the right to use any patent, design or model, plan, secret formula or process and 10% on all other royalties.

Important deviations from the UN Model Convention include:

-   the examples of a permanent establishment (PE) additionally includes
(i) a warehouse in relation to a person providing storage facilities for others, and
(ii) an installation structure, or equipment used for the exploration of natural resources;
-   profits from the operation of ships or aircraft in international traffic will be taxable only in the enterprise's Residence State; and
-   gains derived from the alienation of shares of no less than 15% of the entire shareholding of a company may be taxed in the Resident State of the company except where the assets of the Company consist (directly/indirectly) mainly of immovable property in which case the gains may be taxed by the State in which said property is located.

Important deviations from the OECD Model Convention (though in line with the UN Model Convention) include:

-   the furnishing of services (including consulting and managerial services) via employees or other personnel would constitute a PE if it lasts for more than 180 days in any 12-month period;
-   in determining the profits of a PE, the deduction of certain payments (such as royalties, fees, commission and similar payments) may be denied when payment is made between a PE and a head office; and
-   the Treaty contains an article on independent personal services allowing taxation in the Source State, if a fixed base exists or a stay in the country exceeds 183 days in aggregate in any fiscal year.

The Treaty, in Art. 7 (i.e. Business Profits), also contains a clause denying the benefits of the Treaty if an enterprise arranges its affairs with the primary purpose of obtaining benefits under the Treaty that would not otherwise be available.

In both States, double taxation is generally relieved using the ordinary credit method. The Treaty contains a tax sparing clause regarding the exemptions or reductions granted under Vietnam's foreign investment incentives with respect to profits derived through a PE in Vietnam. Also, where a company of one State receives dividends from a company resident in the other State, the recipient company will be entitled to a (proportionate) credit on the tax paid on the profits from which the dividends are derived (provided the recipient company directly or indirectly holds at least 10% of the shares of the company paying the dividends).

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