The Double Tax Treaty between Russia and the Government of the Hong Kong Special Administrative Region of the People’s Republic of China (the “Treaty”) started to apply in Russia on 1 January 2017. The Treaty will apply in Hong Kong from 1 April 2017.
The Treaty is based on the Model Agreement that was approved by Russian Government’s Resolution No. 84 dated 24 February 2010*. The parties were guided by the relevant OECD and UN documents during the Treaty negotiations.
Previously, income paid by Russian tax residents to Hong Kong tax residents was taxable in accordance with Russian law. Now, the Treaty allows Russian tax residents to enjoy reduced corporate income and personal income tax rates when making payments to Hong Kong tax residents and eliminates double taxation for the residents of both states.
The comparative table below shows the tax rates that applied under Russian law (until 31 December 2016) and those that are now applicable under the Treaty (in Russia effective from 1 January 2017):
Rates applied under Russian law
until 31 December 2016
Rates applicable under the Treaty from 1 January 2017 in Russia
5% when the beneficial owner of the dividends:
- is a company (other than a partnership); and
- holds directly at least 15% of the capital in the company paying the dividends
a 10% rate applies in all other cases
0% as a general rule
20% if the capital gains are derived from:
- the alienation of immovable property;
- the alienation of shares of a company deriving more than 50% of its asset value directly or indirectly from immovable property situated in the other contracting state. This, however, will not apply to gains from the alienation of shares:
- quoted on such stock exchange as may be agreed between the parties to the Treaty; or
- alienated or exchanged as part of the reorganisation of a company; or
- in a company deriving more than 50% of its asset value from immovable property in which it carries on its business.
As Hong Kong is on the Russian Ministry of Finance’s “black list” of offshore zones*, the zero rate provision in the Russian Tax Code (Article 284 Sub-Article 3*) for dividends received from a foreign subsidiary that is continuously held at not less than 50% cannot currently be applied. However, as the Treaty provides for the exchange of information, it is possible that Hong Kong could be excluded from the list in the near future. This initiative was recently announced* by the Russian Ministry of Finance, and the relevant draft has been put up for public discussion.
Moreover, the Treaty provides for a simplified procedure to confirm tax residency: the residency certificates issued by Hong Kong competent authorities do not require legalisation or an apostille to be validly used in Russia.
In addition, certain provisions of the Treaty are aimed at preventing tax evasion. The advantages provided by the Treaty will not apply if “the main purpose or one of the main purposes was to obtain advantages”. Furthermore, the advantages relating to the interests and royalties arising from special relationships between parties apply only to the part of the income that does not exceed the amount which would have been agreed by the parties in the absence of such relationships.
Taking these new developments into consideration, Hong Kong may now be considered as a jurisdiction for setting up companies for tax planning purposes.
* In Russian