Fixed PE

The term Permanent Establishment (PE) includes especially a place of management, a branch, an office, factory, workshop, sales outlet, a warehouse in relation to a person providing storage facilities for others, a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on, and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

Service PE

Furnishing of services, including consultancy services, through personnel or employees, shall constitute a Permanent Establishment, if activities of that nature continue (for the same or a connected project) within a contracting state for a period or periods aggregating more than 183 days within any twelve-month period.

Agency PE

The tax treaty contains Agency Permanent Establishment clause which provides that dependent agent, acting in the state on behalf of an enterprise of other state, shall be treated as having a PE in the first-mentioned state in respect of any activities which that person undertakes for the enterprise if such a person:

• has and habitually exercises in the source state an authority to conclude contracts in the name of enterprise; or
• has no such authority, but habitually maintains in the source state a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or
• has no such authority, but habitually secures orders in the source state, wholly or almost wholly for the enterprise or its associated enterprise.

Business profits and its attribution

Article 7 of the tax treaty also provides for source taxation of business profits to the extent attributable to Permanent Establishment in the source country. While determining the profits of a Permanent Establishment, expenditure which are incurred for the purpose of Permanent Establishment, including executive and general administrative expenditure shall be allowed as deduction.

Shipping and air transport

Profits of an enterprise from the operation of ships or aircraft in international traffic shall be taxable only in the resident country. Such profits from the operation of ships or aircrafts in international traffic may also be taxed in the source state. The tax imposed on such profits shall be reduced by 50%.

Associated Enterprise (AE)

The tax treaty provides for a corresponding adjustment in the profits of AE in the other state:

where an adjustment has been made by a state to profits of a resident, based on arm’s length condition and taxes are levied on such profits adjusted and

such profits are also taxed in the hands of AE in the other state

Dividend and interest

Dividend income is to be taxed at the rate of 10 per cent subject to satisfying beneficial ownership test. Dividend/interest may be taxed in the resident state. However, such dividend/interest may also be taxed in the source state, but if the beneficial owner is a resident of other state, tax rate at 5 per cent on a gross basis is applicable in the case of dividend whereas it is at 10 per cent on a gross basis in the case of interest.

Where such incomes are effectively connected to a PE/fixed base in the source country, taxation will be governed by the provisions of Article 7 or Article 15.

Royalties and Fees for Technical Services (FTS)

Royalty/Fees for Technical Services (FTS) may be taxed in the resident state. However, such royalty/FTS may also be taxed in the source state, but if the beneficial owner is a resident of other state, tax rate at 10 per cent on a gross basis is applicable.

Capital gains

Capital gain arising on sale of shares of an Indian company to be chargeable to tax in India. Capital gain arising on sale of Indian companies shares not covered under clause 1 to 4 to be chargeable to tax in India.

Residual para for taxation of property not covered above including indirect transfer cases to be taxable as per the provisions of the domestic laws.

Independent Personal Services

Income derived by an individual from performance of professional services or other independent activities of a similar character shall be taxable only in the resident state unless such individual has fixed base regularly available to him in the source state for the purpose of performing his activities or his/her stay in the source state is for a period or periods amounting to or exceeding 183 days in any 12 months period commencing or ending in the year of assessment, i.e., fiscal year in the case of India.

Dependent Personal Services

Income in respect of salary, wages, and other similar remuneration may be taxed in source state where employment is exercised unless his/her presence in the source state does not exceed 183 days in any 12 months period commencing or ending in the fiscal year concerned and the remuneration is paid by, or on behalf of, an employer who is not a resident of the source country, and the remuneration is not borne by a PE or a fixed base which the employer has in the other country.

Other income

Other income arising in India will be chargeable to tax in India. Items of income of a resident of a state, wherever arising, not dealt with any of the provisions of the tax treaty shall be taxable only in that state.

Method to eliminate double taxation

Both, India and Hong Kong provide for Foreign Tax Credit (FTC) for the taxes paid in either of the states. The relief is provided by way of credit method subject to maximum deduction limit.

Mutual Agreement Procedure

The tax treaty provides for MAP, where a person may present its case to the competent authority of its resident state if it considers that the actions of one or both of the state result or will result in taxation not in accordance with the provisions of the tax treaty. The limitation would be three years from the first notification of the action resulting in taxation.

General Anti-Avoidance Rule (GAAR) Provisions

The provisions relating to General Anti-Avoidance Rule (GAAR) has been inserted in Dividends, Interest, Royalty, FTS and Capital Gains Article.

Protocol

The protocol annexed with the treaty lays down explanation for the meaning of the certain terms such as ‘Ordinarily resides’, ‘right of abode’ etc.

Way Ahead

The DTAA between India and Hong Kong provide foreign investors, mobile employees and employers with greater tax certainty on the Indian tax treatment of certain income.