The agreement between Hong Kong and Russia for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income has entered into force, according to the Hong Kong Inland Revenue Department.
The agreement was signed in January this year. It came into force on July 29, 2016, after the completion of ratification procedures on both sides. It will be in effect in Hong Kong for any year of assessment beginning on or after April 1, 2017.
Masson de Morfontaine, an international tax and business advisory services firm based in Hong Kong, explains that prior to the enforcement of the agreement, 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 is avoided as any Russian tax paid by the companies on their income is allowed as a credit against tax payable in Hong Kong. (Article 6 of the agreement).
Also under the agreement, Russia's withholding tax rate on royalties, currently at 20 percent (for companies) or 30 percent (for individuals), is capped at three percent. Russia's dividend withholding tax rate on Hong Kong residents is reduced from the current rate of 15 percent to five percent or 10 percent, depending on the recipient's shareholding in the payee, according to Masson de Morfontaine.
Under further provisions, Hong Kong airlines operating flights to Russia are taxed at Hong Kong's corporation tax rate, and are not taxed in Russia. Profits from international shipping transport earned by Hong Kong residents that arise in Russia are also not now taxed in Russia.