Firms will now have the benefit of a lower withholding tax on royalty and interest income under the new double taxation avoidance agreement between India and Hong Kong.

The two countries signed the tax pact on Monday, which is expected to boost the flow of investments, prevent double taxation and also provide for exchange of information.

The DTAA provides for a level playing field with domestic law with a withholding tax of just 10 per cent on interest, royalty and fees for technical services.

Tax experts have called it a significant feature pointing out that it can be as high as 40 per cent in the absence of a DTAA. “While there are no major sops, the rate of 10 per cent withholding on interest stands out,” said Abhishek Goenka Partner and Leader Corporate and International Tax PwC, noting that Hong Kong is an important financial and trading partner and the absence of a treaty was a hindrance.

Rakesh Nangia, Managing Partner, Nangia & Co LLP, said the lower withholding tax is significant but will be provided only on the satisfaction of the ‘main purpose’ test, where in the tax treaty is being taken advantage of.

The DTAA also includes a provision for taxing indirect transfer of capital assets, allowing the country from where 50 per cent of the asset value of a company is derived from to tax any gains from sale of immovable property.

“Gains derived by a resident of a Contracting Party from the alienation of shares of a company deriving more than 50 per cent of its asset value directly or indirectly from immovable property situated in the other Contracting Party may be taxed in that other Party,” said Article 14 of the DTAA.

The pact has also provided exemptions to airline and shipping companies. Profits of a company from operation of ships in international traffic may be taxed in the other country but will be reduced by 50 per cent.

It is also expected to provide certainty and stability in tax administration for business activity with the Articles on Permanent Establishment and Dependent Personal Service.

“The DTAA will give protection against double taxation to over 1,500 Indian companies and businesses that have a presence in Hong Kong and also to Hong Kong-based companies providing services in India,” said Nangia.

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