Hong Kong: DTA signed with Italy
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Hong Kong: DTA signed with Italy



Ayesha Lau

Darren Bowdern

Hong Kong signed a comprehensive double taxation agreement (DTA) with Italy on January 14 2013, taking the number of DTAs concluded by Hong Kong to 27. The DTA will enter into force when both Hong Kong and Italy have completed their formal ratification procedures. Under the DTA, the withholding tax on dividends, interest and royalties is as shown in the table:

The DTA will strengthen economic and trade ties between Hong Kong and Italy, and provide added incentives for companies in Italy to do business and invest in Hong Kong and vice versa. The DTA clearly sets out the allocation of taxing rights between Hong Kong and Italy and will help investors better assess their potential tax liabilities from cross-border economic activity.

Italy non-treaty withholding rate







01/ 12.5




1 Withholding tax on interest reduced to nil where the interest is paid (i) by the government of a contracting party or a local authority thereof; (ii) to the government of a contracting party or any of its political or administrative subdivision or local authority; or (iii) to any agency or instrumentality (including a financial institution) wholly owned or appointed by the government of a contracting party or any of its political or administrative subdivision or local authority and which carries out activities of a governmental nature.

Islamic bonds

The Inland Revenue and Stamp Duty Legislation (Alternative Bond Schemes) (Amendment) Bill 2012 was introduced in the Legislative Council on January 9 2013. The Bill seeks to amend the Inland Revenue Ordinance and Stamp Duty Ordinance to place common types of Islamic bonds on a level playing field with conventional bonds and remove a perceived impediment to the development of a sukuk market in Hong Kong.

The Bill delivers the policy initiative first articulated by the then chief executive Donald Tsang in his policy address in 2007. The proposal was also the subject of a public consultation in March 2012 and many of the comments and suggestions received have been taken on board in the Bill.

The Bill will not confer special tax concessions on the Islamic finance sector, but will ensure that financial instruments of similar economic substance are afforded similar tax treatment. In addition, the Bill will not make specific references to Shariah terminology, and will adopt a religion-neutral approach using the term "alternative bond scheme" (ABS), rather than sukuk, to denote the arrangement to which the proposed tax treatment will apply.

The Bill specifies four types of investment arrangements, corresponding to the different underlying structures by which investment returns are generated in the five most common types of sukuk in the global market. The Bill also proposes to empower the financial secretary to expand the coverage of eligible ABS, by way of subsidiary legislation in future.

For a bond arrangement in a specified ABS to be a qualified bond arrangement, it must satisfy certain qualifying conditions. The qualifying conditions are: (i) the reasonable commercial return condition; (ii) the bond arrangement as financial liability condition; (iii) the Hong Kong connection condition; (iv) the maximum term length condition (maximum term of 15 years); and (v) the arrangements performed according to terms condition.

For a specified investment arrangement in a specified ABS to be a qualified investment arrangement (i) the bond arrangement in the scheme must always be a qualified bond arrangement; and (ii) the scheme must always comply with the bond-issuer as a conduit condition and the investment arrangement as financial liability condition.

The proposed legislation seeks to ensure that a prospective ABS is economically equivalent to a conventional bond structure and eligible for the proposed tax treatment. The Bill also seeks to ensure that safeguards are in place to minimise tax avoidance and that the ABS has a nexus with Hong Kong, thereby promoting Hong Kong's financial market development.

Ayesha Lau (ayesha.lau@kpmg.com) & Darren Bowdern (darren.bowdern@kpmg.com)


Tel: +852 2826 8028 & +852 2826 7166

Website: www.kpmg.com

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