Hong Kong and Bangladesh sign DTA

Monday, 25 September 2023
Hong Kong and Bangladesh have signed a comprehensive double taxation arrangement (DTA), largely based on the OECD's 2017 Model Tax Convention on Income and Capital.

The DTA classes companies as tax-resident in Hong Kong if they are normally managed or controlled in Hong Kong. The 'place of effective management' test is used as a tie-breaker.

Expenses payable by a permanent establishment (PE) in one country to a head office in the other, in form of royalties, fees or commissions, are restricted by the DTA. There is also an exclusion for purchasing activity. Certain activities are listed as exempt from creating a PE, such as using facilities for storage, display or maintenance of stock of the enterprise's own goods; processing, purchasing goods or merchandise; collecting information and other preparatory or auxiliary activities.

Passive streams of income like dividends, interest, royalties, technical services fees and capital gains are generally taxable in the resident jurisdiction. They can also be taxed in the source jurisdiction at reduced withholding rates. Bangladesh's usual withholding rates on dividends, interest and royalties will be reduced from 20 to 10 per cent. Its normal 15 per cent capital gains tax on share disposals will be abolished in most cases.

Foreign tax credits are allowed against taxes paid in the other jurisdiction, in order to eliminate double taxation. Hong Kong residents deriving profits from international shipping transport in Bangladesh can claim a 50 per cent tax reduction in Bangladesh on taxable profits there.

The DTA contains specific provisions against treaty abuse, in particular principal purpose test (PPT) provisions. Under these provisions, the granting of tax benefits under the DTA will be denied if obtaining the benefits was one of the principal purposes of an arrangement or transaction. However, the PPT will not apply if it is established that granting the tax benefits would be in accordance with the purpose of the relevant provisions of the agreement.

The DTA will take effect in Hong Kong for tax years beginning 1 April 2024, if ratification can be completed in 2023.


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