Brendan Harper of Friends Provident International explains recent developments in tax agreements between Hong Kong and the UK, and looks at the implications for individuals.
Date: Mar 2011
In dealing with the position of an individual’s residence, the treaty benefits those people who are resident and working in Hong Kong, but who also maintain strong links with the UK.
For instance, there is a clause in the treaty which states that where someone is resident in both jurisdictions, that individual will only be resident for tax purposes in one jurisdiction, explained Harper. So for individuals resident in Hong Kong, going forward they only have to pay tax on their earnings in Hong Kong, and pay nothing in the UK.
Also of relevance to individuals who move back and forth between Hong Kong and the UK, he added, is a clause relating to pensions. That is important for people who live in Hong Kong but are drawing pensions from the UK, said Harper, because the taxing rights over the pension payment will be retained in the jurisdiction where the pension is paid from.
Given that the top rate of tax in the UK is now 50%, individuals who want to retire in Hong Kong but draw a pension from the UK must be aware of this provision, he said.
According to Harper, the history of this treaty dates to April 2009 when the G20 had its summit in London, and the top nations agreed to adopt OECD standards on tax transparency and exchange of information.
This led to a list divided into three sections – white, grey and black – depending on the progress of individual jurisdictions in adopting the model for tax information exchange internationally.
While Harper said that Hong Kong wasn’t on any of the lists, a footnote stated that through China and its relationship with the G20, Hong Kong had agreed to adopt the internationally-recognised exchange-of-information standard.
As a result, he said the treaty with the UK is just one of many that Hong Kong has signed around the world to implement this commitment.
How clients should respond
For those people from the UK who are deciding that when they retire they will remain in Hong Kong, Harper said they must now bear in mind that if they accrued pension benefits while in the UK – then that income will be subject to UK tax, even if they retire in Hong Kong.
In line with this, he advised them to consider whether to transfer the pension to another jurisdiction, to avoid UK taxation. If they do that, he explained, then under Hong Kong law at present, foreign pension income is not subject to local taxation.
On the flipside, he added, if an individual has accrued pension benefits from Hong Kong and moves back to the UK to retire, then they should probably retain those pension benefits in Hong Kong so they only need to pay 17% tax – according to the current Hong Kong top tax rate.
Broader developments expected
A key reason why Hong Kong has entered into these double tax treaties, according to Harper, is to be able to exchange information with other jurisdictions, and in turn bring it further into the arena as a credible international player.
Going forward and looking more broadly, he said that while the internationally-agreed standard for information exchange is fixed at 12 agreements, this is likely to be increased.
Also, the standard at the moment is exchange-on-request. This compares with the EU, for example, where there is a move towards automatic exchange under tax treaties, said Harper, adding that this is something which might happen in the future in Hong Kong, even if it is some way off for the time being.
In summary, he said anyone considering using Hong Kong to evade tax liabilities in their home jurisdiction will now find this more difficult. So the route to now follow, he advised, is structuring investments to legally mitigate tax rather than illegally evade tax.