What is an international tax treaty?
A tax treaty between two countries is a formal bilateral agreement intended to prevent individuals and companies from being taxed twice or more on the same income, assets, or profits.
A tax treaty may also provide for the exchange of information between the signatory states, allowing the tax authorities of one state to access information about a taxpayer in the other state.
How can you benefit from the double taxation treaty between France and Hong Kong?
The agreement between the Government of the French Republic and the Government of the Hong Kong Special Administrative Region of the People’s Republic of China for the avoidance of double taxation with respect to taxes on income and on capital and the prevention of tax evasion and fraud was signed in 2010.
This
treaty was highly anticipated by individuals and legal entities operating in France and Hong Kong.
Persons covered
The
tax treaty between France and Hong Kong applies to residents of France and/or Hong Kong.
However, the protocol states that a tax resident of one of the countries cannot benefit from the treaty if they conduct their activities in a free-trade zone or benefit from an extraterritorial tax regime (offshore).
However, if the tax resident benefits from a tax regime under which they are taxable only on income sourced in that country, they will benefit from the treaty.
Determining tax residence
A distinction must be made between the tax residence of individuals and that of legal entities. If a conflict of residence arises, the rules will differ.
For more information about the definition of tax residence under French law, refer to Articles 4 A and 4 B of the French General Tax Code.
For individuals, a residence conflict may be resolved by applying the criteria established by the treaty:
- The permanent home (more than 183 days);
- The center of vital interests;
- The place of habitual abode;
- Nationality in the case of France or the right of abode in the case of Hong Kong, etc.
- Legal entities
A legal entity is deemed to be tax resident in the country where its place of effective management is located.
Methods for avoiding double taxation
There are two methods for preventing double taxation and ensuring that income is not taxed a second time in the taxpayer’s country of residence.
- The exemption method:
- Full exemption means disregarding income that has already been taxed,
- Exemption with progression means taking previously taxed income into account when determining the tax rate applicable to other income.
- The tax credit method:
- Full tax credit means calculating tax on the total amount of taxable income, regardless of its source, and deducting the tax paid in the other State,
- Ordinary tax credit means deducting tax already paid, up to the amount of tax in the state of residence attributable to the income taxed abroad (application of a tax credit).
Tax treaties: a tool for combating tax evasion and fraud
Combating tax evasion and fraud is a top priority for every state and international organizations such as the OECD. Measures have been implemented since 2008 to increase administrative cooperation and thereby limit all tax-planning strategies used by individuals and legal entities.
Definition
Simply put, tax evasion can be summarized as all the strategies implemented by a taxpayer, whether an individual or a company, with the aim of reducing the amount of tax they are legally required to pay. One example is transferring assets to another country where the tax regime is more favorable. At this stage, tax evasion appears to be a vague concept, on the boundary between fraud and tax optimization.
Role of international treaties
Tax treaties are intended to prevent potential double taxation resulting from overlapping tax jurisdictions, as well as tax evasion. A treaty defines, for each type of income, which state has the right to tax it.
It facilitates coordination between France and other international tax authorities by applying their respective tax laws (with the countries and territories with which France has signed a treaty, numbering approximately one hundred).
Each tax treaty also incorporates the concept of information exchange, authorizing communications between countries, including the exchange of banking information.
It should also be noted that requests for information must be justified by the tax authorities in order to prevent any abuse.
NB:
: The information shared in this article is general. For a more in-depth analysis of your situation, we recommend consulting a tax lawyer in France.
