Hong Kong and Bangladesh sign DTA
Under this DTA, companies will be considered tax residents of Hong Kong if their primary management or control operations are based in Hong Kong
Hong Kong and Bangladesh have signed a comprehensive double taxation arrangement (DTA) that draws heavily from the OECD's 2017 Model Tax Convention on Income and Capital.
Under this DTA, companies will be considered tax residents of Hong Kong if their primary management or control operations are based in Hong Kong. The determination of tax residency also includes the use of a "place of effective management" test as a tie-breaker.
The DTA places limitations on expenses payable by a permanent establishment (PE) in one country to its head office in the other country, specifically in the form of royalties, fees, or commissions. Notably, there is an exemption for purchasing activity.
Keep updated, follow The Business Standard's Google news channel
Additionally, certain activities, such as using facilities for storage, display, or maintenance of stock, as well as processing goods, purchasing merchandise, collecting information, and other preparatory or auxiliary activities, are listed as exempt from establishing a PE.
When it comes to passive income streams like dividends, interest, royalties, technical services fees, and capital gains, they are typically subject to taxation in the resident jurisdiction.
However, these income types can also face taxation in the source jurisdiction at reduced withholding rates.
In Bangladesh, the usual withholding rates on dividends, interest, and royalties will see a reduction from 20% to 10%. Furthermore, the standard 15% capital gains tax on share disposals will be eliminated in most cases.
To prevent double taxation, individuals and businesses can claim foreign tax credits for taxes paid in another jurisdiction.
Hong Kong residents engaged in international shipping transport within Bangladesh can benefit from a substantial 50% tax reduction on their taxable profits in Bangladesh.
The DTA includes provisions aimed at preventing treaty abuse, particularly through principal purpose test (PPT) provisions. These provisions deny the granting of tax benefits under the DTA if it's determined that obtaining these benefits was one of the main purposes of an arrangement or transaction. However, the PPT will not apply if it can be shown that granting the tax benefits aligns with the intended purpose of the relevant provisions in the agreement.
This DTA is set to take effect in Hong Kong for tax years starting from 1 April 2024, provided that ratification can be successfully completed in 2023.
