By Marina Romanova
The comprehensive double taxation agreement (CDTA) between Russia and Hong Kong entered into force on July 29, 2016, and will go into effect in Russia for any year of assessment beginning on or after January 1, 2017 in Russia and April 1, 2017 in Hong Kong.
The CDTA agreement, which was signed with Moscow in January this year, became Hong Kong’s 34th that has signed with its trading partners. The CDTA sets out clearly the allocation of taxing rights between the two jurisdictions and thus will help investors better assess their potential tax liabilities from cross-border economic activities.
Russia’s double tax deal with Hong Kong is said “to support the territory’s ongoing efforts to expand its CDTA network, in particular with economies along “the Belt and Road.” The Belt and Road, or the Silk Road Economic Belt, is a PRC economic development project, which is primarily aimed at integrating trade and investment among around 60 Eurasian countries.
The agreement is aimed at solving the problems of taxation of business profits, earnings from using property, maritime transport and air conveyance, passive incomes (dividends, interest and royalties) as well as personal incomes.
The agreement “will substantially raise attractiveness of investing in Russian assets for numerous Asian and Western investors acting under the Special Administrative Region’ jurisdiction,” Russia’s Consul General in Hong Kong Alexander Kozlov told TASS, adding that the agreement “will allow to remove the obligation to keep a number of taxes on payments of “passive” incomes to Hong Kong investors by Russian companies in the Russian Federation.”
Hong Kong Government believes that the Hong Kong-Russia CDTA will bolster the economic and trade connections between the two places.
As hg.org writes, the Hong Kong – Russia CDTA also provides tax benefits to Chinese investors who want to make outbound investments in Russia via Hong Kong. The main tax benefits are given by the situation when the Hong Kong intermediate holding company acts as the money lender and intellectual property owner for the operation of Russian subsidiary. A 5 percent and 3percent tax benefits in terms of withholding taxes can be derived for interests and royalties repatriation respectively when those payments are made from a Russian subsidiary back to China via Hong Kong.
According to the Inland Revenue Department’s press release, in the absence of a CDTA, the profits of Hong Kong companies doing business through a permanent establishment in Russia were taxable in both places if the income was sourced in Hong Kong. Under the agreement, double taxation will be avoided as any Russian tax paid by the companies on their income will be allowed as a credit against tax payable in Hong Kong.
Under the agreement, Russia’s withholding tax rate on royalties, currently at 20 percent (in the case of companies) or 30 percent (in the case of individuals) will be capped at 3 percent. Russia’s dividend withholding tax rate on Hong Kong residents will be reduced from the current rate of 15 percent to 5 percent or 10 percent, depending on the percentage of their shareholdings.
In addition, Hong Kong airlines operating flights to Russia will be taxed at Hong Kong’s corporation tax rate, and will not be taxed in Russia. Profits from international shipping transport earned by Hong Kong residents that arise in Russia, which are currently subject to tax there, will also not be taxed in Russia.
In addition to the above, the agreement has also incorporated an article on exchange of information (EOI), which enables Moscow and Hong Kong to fulfil their international obligations on enhancing tax transparency and combating tax evasion.
Russian business in Hong Kong
Many Russian companies prefer to work in China via Hong Kong and to list on the Hong Kong Exchange for raising capital. The aluminum producer Rusal owned by Russian tycoon Oleg Deripaska is the biggest issuer on the Hong Kong Exchange among Russian firms. Last summer Russian mobile operator Megafon has decided to convert 40 percent of its cash, totaling US$1.3 billion on June 30, 2015 to Hong Kong dollars. Novatek, Russia’s second-largest natural gas firm is similarly converting US currency to Hong Kong dollars, Russian media reports.
Russia saw a net capital outflow of $58.9 billion last year, almost three times less than in 2014. This year net capital outflow from Russia, as estimated by the Russia’s Ministry of Economic Development, will amount to about US$25 billion, RIA Novosti reports.
The renminbi has the second-lowest volatility in major currencies and is the world’s second most-used currency for trade finance. Since 2012, lenders from Russia including Gazprombank and Russian Standard Bank have raised 7.5 billion yuan in the market, 2015 data compiled by the Bloomberg shows.
OAO Gazprombank, Russia’s third-largest lender, has been present in China since 2006 with a representative office in Beijing and established a financial services company in Hong Kong, GPB Financial Services HK limited, in 2013.
Chinese investors bought as much US$1 billion of ruble debt last year, Finance Minister Anton Siluanov told state channel Rossiya 24. On July 2015, VTB became the first Russian bank to win a license to trade in China’s interbank bond market. Iron-ore miner Metalloinvest Holding Co. borrowed US$750 million from a syndicate including Chinese banks in 2015, company press release said.
Conversely to Russian monopolists and state-run corporations’, relatively smaller businesses’ reportedly has a trouble to obtain funding in Hong Kong financial institutions.
“A number of banks in Hong Kong have been unwilling to provide financing to certain Russian individuals and corporate entities over the last six months, who failed to pass the banks’ anti-money-laundering procedures,” said Hugo Williamson, managing director of IPSA International, a global risk consultancy, China South Morning Post reported last September.
Anyway, there is hope among Russian business community that CDTA, which is set to enhancing tax transparency and combating tax evasion, would help smaller businesses to successfully pass all required procedures.
Russians have had visa-free access to Hong Kong since 2009, and in the past five years direct flights from second-tier Russian cities such as Far Eastern Vladivostok, Khabarovsk and Siberian Novosibirsk have been launched.
The Russian consul-general in Hong Kong estimated in 2007 that just 600 Russian citizens lived in Hong Kong, but that estimate doubled to 800 by 2013, while the Russian Club thought that the true number might be as high as 2,000 due to the tendency of many Russian expatriates not to register with the consulate. Observers attribute the growth in the population to the expansion of business ties between Hong Kong and Russia.
Mark Zavadskiy, CEO of Asia2Go and then president of the Hong Kong Russian Club, said: “Unlike other Western or European countries, Hong Kong is an exotic, upscale and trendy place for Russia’s younger generation.”
Although, the Russian Orthodox Church in Hong Kong goes back to 1934, when Dmitry Uspensky from Vyazniki of Vladimir Oblast of Russia, has arrived in Southern China from his previous posting in Shanghai.