24 October 2014
Global Tax Alert
Hong Kong and South Africa
sign income tax treaty
EY Global Tax Alert Library
On 17 October 2014, Hong Kong and South Africa signed an income tax treaty (the
Treaty). It is the first income tax treaty Hong Kong has with a jurisdiction in Africa.
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The Treaty with South Africa contains several favorable provisions which are expected
to facilitate closer economic and trade ties between Hong Kong and South Africa.
This alert summarizes the key provisions of the Treaty.
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Who is covered by the Treaty
http://www.ey.com/GL/en/
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The Treaty only applies to persons who are residents of either Hong Kong or South
Africa. Under Hong Kong’s tax law, a company that is incorporated or constituted
under the laws of Hong Kong automatically qualifies as a Hong Kong resident. A
company which is not formed or organized in Hong Kong would be regarded as a
Hong Kong resident only if it is “normally managed or controlled” in Hong Kong.
Tax benefits available to Hong Kong residents under the Treaty
Business profits
Business profits of a Hong Kong resident enterprise will not be liable to tax in South
Africa unless they are attributable to a permanent establishment (PE) maintained by
the Hong Kong enterprise in South Africa.
In addition to the general definition of the term PE, a Hong Kong resident enterprise
will be specifically considered as maintaining a PE in South Africa under the Treaty in
the following situations:
• Having a building site, a construction, assembly or installation project or supervisory
activity in connection therewith, but only if such site, project or activity continues for
a period of more than six months; or
• The furnishing of services by a Hong Kong resident enterprise through employees
or other personnel engaged for such purpose continue (for the same or a connected
project) for a period or periods aggregating more than 183 days within any
12-month period.
A Hong Kong resident individual performing services as an independent contractor in South Africa will not be
liable to tax in South Africa if the individual does not stay in South Africa for a period or periods aggregating
more than 183 days within any 12-month period.
The above treatment would also apply in a reciprocal manner to South African residents deriving business profits
in Hong Kong.
Exemption or reduction of tax on dividends, interest, royalties and capital gains on disposal of shares
Subject to certain specific anti-avoidance provisions, the following table summarizes the applicable withholding
rates for the captioned income received from South Africa by a Hong Kong resident as beneficial owner.
Tax rate / Passive income
Normal withholding rate
Reduced rate under the Treaty
Dividends
Interest
Royalties
Service fees
Capital gains on
disposal of shares
15%
15%2
15%
15%4
0%6
5/10%1
0/10%3
5%
0%5
0%
Endnotes
1. A 5% rate applies if the beneficial owner of the dividends is a company which holds directly at least 10% of the capital of
the company paying the dividends. For other cases, the 10% rate applies.
2. Under the domestic tax rules of South Africa, certain interest income paid to nonresidents will be exempt from withholding
tax, such as interest paid by the South African Government or any South African bank as well as interest paid in respect of
any listed debt instrument.
3. A 0% rate applies if the beneficial owner of the interest is the HKSAR Government, the Hong Kong Monetary Authority
or any institution wholly or mainly owned by the HKSAR Government as may be agreed from time to time between the
competent authorities of the contracting parties.
4. Effective from 1 January 2016, service fees in respect of technical, management or consultancy services (from a source
in South Africa) payable to a nonresident will be subject to a 15% service withholding tax in South Africa.
5. In instances where a Hong Kong resident enterprise or individual earns service fees from a source in South Africa, but
such service fees are not attributable to its PE situated in South Africa, the withholding tax on service fees would not
apply under the treaty.
6. Nonresidents are generally not subject to the capital gains tax in South Africa on the disposal of shares. An exception
to this is the disposal of shares in companies that are land rich. Under domestic law, gains on disposal of shares will be
subject to tax if they (i) comprise equity shares that, either directly or indirectly, derive at least 80% of their market value
from immovable property situated in South Africa (held otherwise than as trading stock); and (ii) the seller (whether alone
or together with related parties) holds at least 20% of such equity shares. Exemption is nonetheless available, under the
treaty, if the shares being disposed are quoted on a recognized stock exchange or the company in question carries on its
business in the immovable property concerned.
Effective date
The Treaty will only come into force in the tax year following the calendar year in which the relevant ratification
procedures are completed. Assuming that the ratification procedures can be completed in 2014, the Treaty will
have effect as follows:
• In Hong Kong: for any year of assessment beginning on or after 1 April 2015;
• In South Africa: in respect of taxes withheld at source, for amounts paid or credited on or after 1 January 2015;
and in respect of other taxes, for any years of assessment beginning on or after 1 January 2015.
2
Global Tax Alert
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Services Limited, Hong Kong
• Tracy Ho +852 2846 9065
• Florence Chan
+852 2849 9228 [email protected]
[email protected]
Ernst & Young LLP, Hong Kong Desk, New York
• Connie HF Chan
+1 212 773 2661
[email protected]
Ernst & Young LLP, Pan African Tax Desk, New York
• Dele A. Olaogun +1 212 773 2546 • Mzukisi Ndzipo +1 212 773 9917 [email protected]
[email protected]
Ernst & Young LLP, Asia Pacific Business Group, New York
• Chris Finnerty
+1 212 773 7479
[email protected]
• Kaz Parsch
+1 212 773 7201
[email protected]
• Bee-Khun Yap
+1 212 773 1816
[email protected]
Global Tax Alert
3
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