Canada Hong Kong Tax Agreement
4. The competent authorities of the parties endeavour to resolve by mutual agreement any difficulty or doubt about the interpretation or application of this agreement. The use of the term “resident of a party” as opposed to “Resident of a Contracting State” should not affect the application of Canadian rules to foreign subsidiaries. For example, Canadian foreign subsidiary rules provide that income from the active operations of a foreign subsidiary of a Canadian company classified as a tax-exempt surplus may be distributed to the Canadian entity in the form of a Canadian tax-free dividend if the foreign subsidiary is established in a country with which Canada has a tax agreement or tax information exchange agreement (TIEA). Regulation 5907 (11) of the Canada Income Tax Act (the “Tax Act”) is drafted in such a way that a designated contracting country with which Canada has a comprehensive agreement or agreement to abolish double taxation includes “a sovereign state or other jurisdiction.” Therefore, the fact that Hong Kong is not a sovereign state as such should not affect the tax-free repatriation of tax-exempt surpluses from a Hong Kong-based foreign subsidiary. However, the language of Regulation 5907 (11.2) 1 is somewhat ambiguous in light of Hong Kong`s “case law,” unlike a “country,” and the rating agency may ultimately be asked to provide clarification on the interpretation of this provision. 1 Regulation 5907 (11.2) does not, according to a foreign subsidiary, end in a country with which Canada has an agreement or comprehensive agreement to abolish double taxation, unless the foreign subsidiary is generally established in that country within the meaning of the convention or convention. There have also been significant developments that have had an impact on the Canada-China treaty. On February 19, 2012, the Canadian Prime Minister`s Office announced that the Canadian and Chinese governments had reached an agreement in principle to update the Canada-China Treaty.
Future expected updates to the Canada-China Treaty could have an impact on the benefits of structuring investment structures from mainland China to Canada via Hong Kong. Therefore, such out-of-lab investment structures should be reviewed as soon as the draft new version of the new Canada-China treaty is published. 2. The competent authority referred to in paragraph 1 endeavours to resolve the case, by mutual agreement with the competent authority of the other party, with respect to tax evasion which is not in accordance with this agreement, where the objection appears to be justified and is not itself in a position to find a satisfactory solution. Any agreement reached will be implemented in the internal law of the parties, regardless of the time limit. (d) if the person has the right to stay in the Hong Kong Special Administrative Region and is also a Canadian national, or if the person does not have the right to reside in the Hong Kong Special Administrative Region and is not a Canadian national, the competent authorities of the contracting parties resolve the matter by mutual agreement. 3. If, under paragraph 1, a person other than a person is established in both parties, the competent authorities of the parties agree to clarify the issue and determine the nature of the application of this agreement to that person.