Hong Kong and Bangladesh have signed a comprehensive double taxation arrangement (DTA), aligned with the OECD’s 2017 Model Tax Convention on Income and Capital. Under this DTA, companies will be considered tax residents of Hong Kong if their primary management or control operations are based there. The DTA also introduces a “place of effective management” test for tax residency determination.
The DTA places restrictions on expenses payable by a permanent establishment (PE) in one country to its head office in the other country, except for purchasing activities. Certain activities, like storage, display, or maintenance of stock, are exempt from establishing a PE. Passive income streams, including dividends, interest, royalties, and capital gains, are typically taxed in the resident jurisdiction but may also face reduced withholding rates in the source jurisdiction. For example, Bangladesh’s withholding rates on dividends, interest, and royalties will decrease from 20% to 10%.
The DTA includes measures to prevent treaty abuse, with principal purpose test (PPT) provisions aimed at denying tax benefits if they were a primary purpose of an arrangement or transaction. The DTA is expected to take effect in Hong Kong from April 1, 2024, pending ratification in 2023.
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