India and Hong Kong have entered into a double taxation avoidance agreement. This is aimed at stimulating the flow of investment, technology and personnel from India to Hong Kong and vice versa, preventing double taxation and providing for exchange of information. It will improve transparency in tax matters and help curb tax evasion and tax avoidance.

Investors will get an advantage of a lower withholding tax of 10 per cent on interest or royalties provided they fulfill the main purpose test, which broadly checks that the transaction is not entered into specifically to avoid taxes. It also provides for capital gains taxation of indirect transfers. It provides that gains from sale of shares of a company deriving more than 50 per cent of its value from property situated in a country will be taxed in that country. There are exemptions for airline and shipping companies.

Hong Kong is an important financial and trading partner and the absence of a treaty was a hindrance. Now things are expected to move forward. The agreement is expected to give protection against double taxation to over 1,500 Indian companies and businesses that have a presence in Hong Kong as well as to Hong Kong-based companies providing services in India.