Treaty on Avoidance of Double Taxation between Serbia and Hong Kong
Author: Attorneys-at-Law Vojinović B. Milan and Ćiraković M. Goran, the Law Firm “VUK Tax Attorneys”
Date: 1th February 2021
In August 2020, the Government of the Republic of Serbia and the Government of Hong Kong of the Special Administrative Region of the People's Republic of China (hereinafter: „Hong Kong“) signed the Treaty on Elimination of Double Taxation, Tax Evasion and Tax Avoidance regarding Income and Capital (hereinafter: the „Treaty“). Serbian National Assembly adopted on December 24th December 2020 the Law on Ratification of the Treaty, by which this Treaty has become an integral part of the Serbian legislation.
In the Republic of Serbia, the Treaty came into force on 30th December 2020, and it is applicable as of 1st January 2021, while in Hong Kong, the Treaty will be applicable as of 1st April 2021.
The Treaty is largely based on the provisions of the OECD Model Tax Convention on Income and Capital, as well as most of the DTTs ratified by the Republic of Serbia, and it contains the provisions on basic concepts and relevant issues related to double taxation, such as status of tax resident, permanent establishment, income from real estate, business profits, dividends, interests, royalties, capital gains etc.
Regarding the content of the Treaty, we would like to highlight withholding tax (WHT) rates on dividends, interests and royalties which the contracting state, where income is sourced, may apply on payments thereof:
- 5% of dividend gross amount if beneficial owner is the company which, during the period of the 365 days including the day of dividend payment, directly owns 25% of shares of the company that pays the dividends (for the purpose of the calculating this period, changes in the company ownership which would result from corporate reorganization are not taken into account, such as mergers and acquisitions of the company that holds shares or pays the dividend);
- 10% of dividend gross amount in all other cases.
- 10% of interest gross amount.
- 5% of the royalties’ gross amount (for usage or right to use copyright on literary work, artwork or science work, including cinema movies or movies or tapes for television or radio);
- 10% of royalties’ gross amount (for usage or right to use patents, trademarks, drafts or models, plans, secret formula or procedure, or for usage or right to use industrial, commercial or scientific equipment, or for information related to industrial, commercial or scientific experience – expertise knowledge/know-how).
Upon ratification of the Treaty, Serbian Rulebook on the List of Countries with Preferential Tax Regime (hereinafter: the „Rulebook“) was amended with effect as of 1st January 2021. The amendment relates to deletion of Hong Kong from the list of countries with preferential tax regim („tax havens“). Consequently, from said date, payments to legal entities – residents of Hong Kong will no longer be subject to special WHT rate of 25%, and general WHT rules from Serbian Corporate Income Tax Law will apply, with possibility of applying privileged tax regime from the Treaty.
Namely, the Serbian Corporate Income Tax Law defines that WHT at the rate of 25% is imposed on gross payments to non-resident entities from tax havens for dividends, interest, royalties, rental fees, and all types of services regardless of place where they are supplied or used. Having in mind that as of 1st January 2021, Hong Kong is removed from Serbian list of tax havens, general WHT rules will apply on transactions with legal entities – residents of Hong Kong, i.e. exception from the Serbian Corporate Income Tax Law concerning special WHT rate of 25% chargeable on transactions with entities from tax havens will no longer be relevant. Consequently, for certain types of services such as consulting, transportation, IT services, marketing, advertising via internet and other public media, lease of media space, production of videos and advertisements etc., payment of fees by Serbian resident legal entities to Hong Kong resident legal entities, is not subject to Serbian WHT as of 1st January 2021. For these types of services, Serbian residents that pay fees to Hong Kong residents are not obliged to refer to the Treaty for the purpose of not charging, not declaring, and not paying WHT.
For payments of income to non-residents (that are not residents of “tax havens”) for dividends, royalties, interest, rental fees, Serbian Corporate Income Tax Law imposes WHT rate of 20% applicable on gross amount of income paid. In order that payer of income – Serbian resident may apply privileged WHT regime from the Treaty, it is necessary to cumulatively fulfil two conditions at the moment of payment, as follows: 1) it must possess certificate on Hong Kong tax residency for entity which receives income, and 2) non-resident legal entity from Hong Kong has to be beneficial owner of income (i.e. it cannot collect income in the name or for the account of another entity). If at the moment of payment Serbian resident does not possess tax residency certificate, or non-resident entity is not beneficial owner of income, then Serbian payer of income is obliged to submit tax declaration, charge and pay WHT at the rate of 20%.
Having in mind all afore said, we can conclude that the Treaty constitutes legal basis for more efficient business operations and competitiveness of companies from the Republic of Serbia and Hong Kong that exercise mutual cooperation, which represents significant contribution to improving bilateral commercial and financial relationships.