On 7th November 2022, Hong Kong signed a comprehensive double tax agreement (CDTA) with Mauritius which will enter into force following the completion of the ratification procedures in both jurisdictions.
Some of the key features of the CDTA are:
Tax Residency
An entity shall only be tax resident in the contracting state where its place of effective management is situated should it meet the tax residency rules for both Mauritius and Hong Kong.
Elimination of Double Tax
Double tax in Hong Kong will be eliminated by way of a tax credit. Therefore, any income taxes paid in Mauritius in respect of income earned in Mauritius by a resident of Hong Kong, will be allowed as a tax credit against tax which is payable in Hong Kong in respect of the same income.
Similarly, the law in Mauritius already allows for taxes paid overseas to be used as a credit against tax payable on the same income.
Profits from International Shipping and Air Transport
Profits from international shipping and air transport earned by Hong Kong residents arising in Mauritius will not be taxed in Mauritius.
These profits include those from operations of aircraft or ships for the transport of people and goods, as well as those profits earned from the leasing of aircraft or ships on a bareboat charter basis, income from ticket sales, and interest earned on funds directly associated with the operation of these vessels in international traffic.
Dividends, Interest & Royalties
Mauritius will cap its withholding tax rates for Hong Kong residents on dividends, interest and royalties at 5%.
Capital Gains Tax
Currently, Mauritius and Hong Kong do not impose any taxes on capital gains derived from the sale of shares by non-residents. Should Mauritius impose capital gains tax in future, the gains derived from the disposal of shares in a Mauritian company by a Hong Kong resident will generally be exempt from tax in Mauritius under the CDTA.
Prevention of Treaty Abuse
Specific provisions have been included in the CDTA to prevent treaty abuse:
- A preamble specifying that the agreement is intended to eliminate double taxation without creating opportunities for reduced tax or non-taxation through evasion or avoidance.
- The agreement has included a “Principle Purpose Test” whereby benefits under the CDTA would be denied if it is reasonable to conclude, with all facts and circumstances considered, that the principle purpose of the transaction or arrangement was to obtain the benefits.
Effective Date
The CDTA will come into effect in the tax year that follows the calendar year in which the ratification process is completed. Therefore, if the ratification procedures are completed in 2022, the CDTA will come into force as follows:
- Mauritius – 2023/2024 tax year which begins on 1 July 2023
- Hong Kong: year of assessment 2023/2024 which begins on 1 April 2023.
The agreement aims to strengthen and promote economic and trade connections between Hong Kong and Mauritius and will help investors to better assess their potential tax liabilities from cross-border economic activities.