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Malaysia & Hong Kong Tax Treaty Includes the Investment Appeal of Labuan
In a welcome development on 25 April 2012, Malaysia and Hong Kong signed a tax treaty that has been published, and is now pending ratification. Taxand Malaysia details this treaty and the potential risks and opportunities for global organisations.
The signing of the Malaysia - Hong Kong tax treaty provides welcomed clarity on the taxation rights of the two jurisdictions and offers treaty protection for taxpayers operating in these two locations.
The following sets out some of the salient features of the treaty:
- Reduced rates of withholding tax (WHT) on interest, royalties and fees for technical services as compared with Malaysian domestic WHT rates. The rates are summarised in the table below:
|Under the treaty||Non-treaty|
||5% or 10%||0%|
- Unlike the amended treaty that Malaysia recently signed with India, the Hong Kong treaty does not exclude Labuan from the scope of the treaty. Labuan, while geographically located within Malaysia, operates a preferential tax regime for companies set up under the Labuan Companies Act, 1990 and for other entities established under the relevant Labuan legislation. The preferential tax rate is subject to the Labuan entities operating within a permitted framework, and the Labuan entity concerned will be taxed under the domestic tax laws only if the conditions for the preferential tax rate are not met. In view of the preferential tax regime, Labuan has been excluded from the scope of some of the tax treaties with Malaysia, including the treaties with Australia, Germany, India, Japan, the Netherlands, and the UK. The fact that Labuan remains within the scope of the Hong Kong treaty is useful in providing potential avenues for structuring investments into either country via Labuan entities for tax efficiency, subject to substance considerations.
- On the issue of permanent establishments (PEs), the standard PE provisions (seen in most current tax treaties) will also apply in the context of the Malaysia - Hong Kong treaty. It should be noted that the provision of services, including consultancy services for more than an aggregate of 183 days within any 12 month period, will give rise to a PE.
The treaty will become effective once both jurisdictions have completed the necessary ratification procedures and notified each other in writing. The effective dates for each country are as follows:
- Malaysia - For any year of assessment beginning on or after the first day of January in the calendar year following the year in which the treaty enters into force. For example, should the treaty enter into force on 20 December 2012, the provisions of the treaty shall take effect from the year of assessment 2013.
- Hong Kong - For any year of assessment beginning on or after the first day of April in the calendar year following the year in which the treaty enters into force.
The Malaysia - Hong Kong tax treaty provides a useful framework for the structuring of businesses and investments between both countries. In particular, Labuan could provide an attractive avenue for Hong Kong entities to structure investments in Malaysia given the preferential tax regime available. Further, the treaty, coupled with the fact that Malaysia does not tax foreign sourced income, nor does it impose withholding tax on dividends, makes Malaysia an attractive holding company or intermediate holding company location.