Are you thinking of setting up or moving your business abroad while living in Spain? Carry on reading to find out where you would be liable to pay tax according to the Double Taxation Agreement between Spain and Hong Kong.
Double Taxation Agreements (DTAs) also known as Double Taxation Treaties, are agreements between two states designed, on the one hand, to protect individuals and businesses against the risk of double taxation when the same income can be taxable in two jurisdictions; and on the other hand, protect the government’s taxing rights and stop attempts to avoid or evade tax.
They can often be complex and require professional assistance; however, in this article we are going to focus on explaining some of the most relevant and useful points in this situation.
What taxes are covered by the agreement?
The rules found in the Double Taxation Agreement between Spain and Hong Kong are applicable to the following list of taxes from each territory:
- Income Tax – Profit Tax
- Corporation Tax – Salaries Tax
- Non Resident Income Tax – Property Tax
- Wealth Tax
- Tax Residency
- Profit Tax
- Salaries Tax
- Property Tax
Under Spanish laws, individuals are considered a tax resident when they have their usual residence in Spanish territory. This happens when you either:
- Spend more than 183 days a year in Spain (January-December)
- It is where your main economic activities or interests lie
- There is also a presumption you are a resident in Spain when your spouse and minor children are resident there
In addition, when it is a company’s residency in question, they are liable to pay Spanish Corporation Tax when any of the following apply:
- They are set up according to Spanish laws
- Their social domicile is in Spain
- The effective management headquarters are located in Spain
On the other hand, in Hong Kong you obtain residency status when you meet any of the following requirements:
- An individual who ordinarily resides in Hong Kong
- An individual who stays in Hong Kong for more than 180 days during a year of assessment or for more than 300 days in two consecutive years of assessment one of which is the relevant year of assessment
- Company incorporated or constituted in Hong Kong
- Company incorporated or constituted outside Hong Kong but managed or controlled in Hong Kong.
If the outcome from these rules indicates you are a resident in both Contracting Parties, for individuals the following tie-breaking rules apply:
- You shall be deemed to be a resident only of the Party in which you have a permanent home available to you; if you have a permanent home available to you in both Parties, you shall be deemed to be a resident only of the Party with which your personal and economic relations are closer (“centre of vital interests”)
- If the Party in which you have their centre of vital interests cannot be determined clearly, you shall be deemed to be a resident only of the Party in which you live on the most regular basis.
- If the period of stay is similar in both of them or in neither of them, you shall be deemed to be a resident only of the Party in which you have the right of residence (in the case of the Hong Kong Special Administrative Region) or of which you are a national (in the case of Spain)
- If neither of these apply, the competent authorities of the Contracting Parties shall settle the question by mutual agreement.
The tiebreaking rule for companies that qualify for residency in both Parties is where the place of effective management is situated
- Business Profits
The profits of an enterprise of a Contracting Party (Hong Kong) shall be taxable only in that Party unless the enterprise carries on business in the other Contracting Party (Spain) through a permanent establishment situated therein. In which case, the profits of the enterprise may be taxed in the other Party (Spain) but only so much of them as is attributable to that permanent establishment.
Dividends paid by a company, which is a resident of a Contracting Party (Hong Kong) to a resident of the other Contracting Party (Spain), may be taxed in that other Party (Spain). Such dividends may also be taxed in (Hong Kong) and according to the laws of that Party. However, if the beneficial owner of the dividends is a resident of Spain, the charged tax cannot exceed 0-10% of the gross amount of the dividend, depending on the case.
- Capital Gains
Gains derived by a resident of a Contracting Party from the sale of real estate property situated in the other Contracting Party may be taxed in that other Party.
Gains from the sale of movable business property of a permanent establishment that an enterprise of a Contracting Party (Hong Kong) has in the other Contracting Party (Spain), including gains from the sale of such permanent establishment, may be taxed in (Spain).
- Income from employment
Salaries, wages and other similar remuneration derived by a resident of a Contracting Party (Spain) in respect of an employment shall be taxable only in that Party unless the employment is exercised in the other Contracting Party (Hong Kong). In which case, such remuneration may be taxed in that other Party (Hong Kong).
- How to avoid double taxation?
When an individual or company is a resident in Hong Kong, due to the territorial basis, income that isn’t earned in Hong Kong will probably be taxed by the other Party.
On the other hand, when you are a resident in Spain, where you are taxed on your worldwide income, you can obtain tax relief in your Income Tax or Corporation Tax by deducting the tax you have already had to pay abroad.
Please note that this information is for general use only. For accurate advice and guidance, we highly recommend you book an appointment with an independent lawyer. Additionally, please see the following link: Taxes in Spain.
For more information or assistance, do not hesitate to contact Pellicer & Heredia on + 34 965 480 737 or email us at firstname.lastname@example.org.