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Print articleIndonesia and Hong Kong Sign Double Tax Treaty
August, 2010 -
On 23 March 2010, Indonesia and Hong Kong signed a new agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (“Tax Treaty”). To date, the Tax Treaty has not yet been ratified by either country. It is expected that the Tax Treaty will come into force in early 2011 following its ratification. All residents of Hong Kong (who are not subject to the tax treatment applied to a ‘permanent resident’ in Indonesia) receiving income from Indonesia (such as dividends, interest and royalties) are currently subject to a 20% withholding tax under the Indonesian Income Tax Law. Under the new Tax Treaty, the withholding tax rate for dividends will be reduced to 10% and if a Hong Kong company directly holds at least 25% of the share capital of an Indonesian company, the rate will be reduced even further to 5%. Compared the withholding tax on dividends offered in any other tax treaties signed by Indonesia, the Tax Treaty offers the lowest rate (ie maximum 5% withholding tax). The withholding tax rates will be reduced to a maximum of 10% and 5% respectively for interest and royalties. The maximum 5% withholding tax rate for royalties is currently only offered to Qatar and the United Arab Emirates. With the application of the Tax Treaty, profits of a Hong Kong company doing business through a branch in Indonesia, which in the absence of a tax treaty are subject to double taxes if the profits derived by the branch are not regarded as offshore for Hong Kong profits tax purposes, will only be subject to a maximum 5% withholding tax on the after-tax amount (except for Production Sharing Contract and Contract of Work companies in Indonesia). The 5% rate for withholding tax on branch profits is currently only offered in the tax treaties with Taiwan and the United Arab Emirates. The double taxation currently applied to a Hong Kong company’s branch will be avoided by means of a tax credit under the Tax Treaty. Further advice on how a Hong Kong company can enjoy the benefits of the Tax Treaty in practice (for example, with regard to the mode of application) will need to be sought once the Tax Treaty comes into force. * * * |
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