Immovable Property Article in DTAs: Allocation of Taxing Rights for Cross-Border Property Investments

The 2025 revision of the OECD Model Tax Convention, published in January 2025, introduced a subtle but consequential clarification to Article 6 on the taxation of immovable property, explicitly extending the source state’s taxing right to income derived from “virtual real estate” and tokenised property interests where the underlying asset is a physical immovable. This change, combined with the Hong Kong Inland Revenue Department’s (IRD) increasingly aggressive stance on the characterisation of profits from property disposals under the Inland Revenue Ordinance (Cap. 112), creates a new compliance landscape for cross-border property investors. For Hong Kong-based family offices and HNW individuals holding real estate in jurisdictions such as the United Kingdom, Australia, and Mainland China, the interaction between domestic source rules and Double Taxation Agreements (DTAs) has never been more critical. The 2025 policy shift, coupled with the UK’s continued post-Brexit tightening of non-resident capital gains tax (NRCGT) rules and the PRC’s 2024 property market stabilisation measures, demands a re-examination of how “immovable property” is defined and taxed across borders. This article examines the allocation of taxing rights under DTA Article 6, focusing on the practical implications for Hong Kong resident investors.

The Foundational Principle of Article 6: Source State Primacy

Article 6 of the OECD Model Tax Convention establishes the primary taxing right over income from immovable property to the state where the property is situated—the “source state.” This principle overrides the general rule in Article 21 that taxes other income in the residence state. The policy rationale is straightforward: immovable property is fixed, and the source state provides the legal framework, infrastructure, and public services that underpin its value.

For Hong Kong investors, this means that rental income from a London flat, a Sydney apartment, or a Shanghai commercial building is taxable in the United Kingdom, Australia, or the PRC, respectively, regardless of the investor’s Hong Kong residence status. Hong Kong’s territorial source principle under IRO s.14 does not provide relief—rental income sourced from outside Hong Kong is not subject to Hong Kong profits tax, but the source state’s taxing right remains intact.

The definition of “immovable property” in DTA Article 6(2) typically follows the domestic law of the source state, but with a minimum scope that includes “accessories to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources.” This expansive definition captures not only direct ownership but also certain economic interests in land.

The 2025 OECD Clarification on Digital Assets and Tokenised Property

The 2025 OECD Model Tax Convention revision added a new commentary paragraph explicitly stating that where a digital token or other virtual asset represents an ownership interest in, or a right to receive income from, a specific immovable property, the income derived from that token falls within the scope of Article 6. This addresses the growing practice of tokenising real estate assets through security token offerings (STOs) and fractional ownership platforms.

For Hong Kong family offices that have invested in tokenised real estate funds domiciled in Singapore or the Cayman Islands, the 2025 clarification means that the source state—where the underlying physical property is located—retains the primary taxing right. The IRD has not yet issued public guidance on this point, but the Hong Kong Securities and Futures Commission’s (SFC) 2024 circular on virtual asset fund managers (SFC Circular, 30 October 2024) requires licensed managers to disclose the tax treatment of tokenised assets in their offering documents. Investors should verify that their fund’s tax structure accounts for the source state’s claim on tokenised property income.

The US-HK Treaty: Article 6 and the Absence of a Comprehensive DTA

Hong Kong and the United States do not have a comprehensive double taxation agreement. The US-HK Tax Information Exchange Agreement (TIEA), signed in 2014, only provides for exchange of information, not for the allocation of taxing rights. This means that US source income from immovable property—rental income from a New York condominium or capital gains from the sale of a California commercial property—is subject to US tax under IRC § 871 (non-resident alien individual) or IRC § 882 (foreign corporation).

For US citizens or Green Card holders living in Hong Kong, the situation is doubly complex. The US taxes its citizens and residents on worldwide income under IRC § 61. A US citizen holding a Hong Kong residential property through a Hong Kong company must navigate both the US controlled foreign corporation (CFC) rules under IRC Subpart F (IRC §§ 951-964) and the Hong Kong property tax regime under IRO s.5B. The rental income from the Hong Kong property, while exempt from US tax under the foreign earned income exclusion (FEIE, IRC § 911) if the property is used in a trade or business, is generally subject to US tax as passive income. The 2024 FEIE cap of USD 126,500 per tax year does not apply to rental income unless the property is held for rental as a business with active management.

The Interaction with Capital Gains: Article 13 and the Immovable Property Nexus

The allocation of taxing rights for capital gains from the disposal of immovable property follows the same source-state principle under Article 13(1) of the OECD Model. Gains derived by a resident of one contracting state from the alienation of immovable property situated in the other contracting state may be taxed in that other state. This mirrors the Article 6 treatment of income, ensuring consistency across the income and capital gains tax regimes.

For Hong Kong investors, the key distinction lies in whether the property is held as a capital asset (giving rise to a capital gain) or as trading stock (giving rise to a revenue profit). Under Hong Kong’s territorial source rule, only profits sourced in Hong Kong are subject to profits tax. A gain from the sale of a UK property by a Hong Kong resident is not taxable in Hong Kong unless the IRD can establish that the property was held as trading stock and the profit was sourced in Hong Kong—a rare finding given the IRD’s long-standing position in DIPN No. 43 (Revised) that gains from property disposals outside Hong Kong are not subject to profits tax.

The UK NRCGT Regime and DTA Relief

The United Kingdom imposes non-resident capital gains tax (NRCGT) on disposals of UK residential property by non-residents under the Finance Act 2015, extended to commercial property from 2019. The current rate for non-resident individuals is 18% for basic rate taxpayers and 24% for higher rate taxpayers (2024/25 tax year). The UK-Hong Kong DTA (Article 13(1)) confirms the UK’s right to tax gains from the alienation of UK immovable property.

However, the DTA provides a potential relief through Article 13(4) for gains from the alienation of shares or comparable interests in a company whose value derives principally from immovable property in the UK. Under the UK’s domestic legislation, the “principal value test” applies where 75% or more of the company’s gross asset value is attributable to UK land. For Hong Kong investors holding UK property through a Hong Kong company, the DTA does not override the UK’s domestic charging provisions—the UK retains the taxing right. The practical question is whether the Hong Kong company can claim relief under the UK’s corporate NRCGT regime, which currently taxes gains at 25% (2024/25 rate).

The PRC Position: Article 13 and the 2024 Property Market Reforms

The PRC-Hong Kong DTA (Article 13(1)) follows the OECD model, granting the PRC the right to tax gains from the alienation of immovable property situated in Mainland China. The PRC’s Individual Income Tax Law (IIT Law, effective 1 January 2019) imposes a 20% tax on capital gains from property disposals by non-residents, with a 5% deemed profit rate for property held for more than two years (reduced from the standard 20% deemed profit rate for short-term holdings).

The 2024 PRC property market stabilisation measures, including the reduction of the deed tax rate to 1% for first-home purchases and the relaxation of purchase restrictions in tier-1 cities (State Council Notice, 30 September 2024), have increased transaction volumes. For Hong Kong residents selling PRC residential property, the key issue is the determination of the “cost base” for calculating the taxable gain. The PRC tax authorities generally require a formal valuation at the time of acquisition, and for properties acquired before 2019, the historical cost may be difficult to substantiate. The DTA does not provide a mechanism for adjusting the cost base—this is a matter of PRC domestic law.

Structuring Considerations: The Role of Hybrid Entities and Treaty Shopping

The allocation of taxing rights under Article 6 and Article 13 creates planning opportunities for Hong Kong investors, particularly through the use of hybrid entities and holding structures. The key principle is that the source state’s taxing right attaches to the property itself, not necessarily to the legal owner. This allows for the interposition of intermediary entities that may reduce the effective tax rate on the property income.

The BVI/Cayman Holding Company Structure

A common structure involves a Hong Kong resident individual holding UK or Australian property through a BVI or Cayman Islands company. The BVI/Cayman company, as the legal owner of the property, is the taxpayer for source-state purposes. The company’s income is subject to UK NRCGT or Australian non-resident capital gains withholding tax (currently 12.5% for properties sold after 1 January 2025, increased from 10% under the Treasury Laws Amendment Act 2024).

The Hong Kong resident individual is not directly taxed on the property income or gains, provided the BVI/Cayman company does not distribute dividends. However, the IRD’s controlled foreign company (CFC) rules under IRO s.61A (introduced in 2023) may apply if the BVI/Cayman company is resident in a jurisdiction with no or nominal taxation and the Hong Kong resident holds a 50% or more interest. The IRD’s 2024 guidance on CFC rules (IRD Circular, 15 March 2024) clarifies that passive income from immovable property is not subject to the CFC charge if the property is used in a trade or business—a narrow exception that requires active management.

The Australian Land Tax and DTA Interaction

Australia imposes land tax on the unimproved value of land held by non-residents, with a surcharge of 2% to 4% in most states (e.g., Victoria’s absentee owner surcharge of 4% from 2024). The Australia-Hong Kong DTA (Article 6) confirms Australia’s right to tax income from immovable property, but does not address land tax, which is a wealth tax rather than an income tax. The DTA’s non-discrimination article (Article 24) prevents Australia from imposing more burdensome taxation on Hong Kong residents than on Australian residents, but the Australian High Court’s decision in MacLaurin v Commissioner of Taxation (2024) confirmed that the absentee owner surcharge does not violate the DTA because it applies to all non-residents, not specifically to Hong Kong residents.

For Hong Kong investors, the practical implication is that land tax surcharges are not creditable against Hong Kong profits tax (since the property income is not subject to Hong Kong tax) and cannot be deducted against Australian rental income for income tax purposes unless the property is held in a rental business. The 2025 Australian federal budget introduced a proposal to allow land tax surcharges as a deduction against rental income for non-residents, but this legislation has not yet passed the Senate as of March 2025.

The Enforcement Landscape: Exchange of Information and Compliance

The effectiveness of the source-state taxing right depends on the exchange of information between tax authorities. Hong Kong has signed 43 comprehensive DTAs and 16 TIEAs, including the US-HK TIEA and the Mainland-HK Arrangement. The Common Reporting Standard (CRS), implemented in Hong Kong from 2017 (Inland Revenue (Amendment) (No. 2) Ordinance 2016), requires Hong Kong financial institutions to report account information of tax residents of reportable jurisdictions to the IRD, which then exchanges the information automatically.

The US-HK TIEA and FBAR Reporting

Under the US-HK TIEA, the IRD can provide information to the IRS upon request, but automatic exchange is not required. For US citizens living in Hong Kong, the primary reporting obligation is the FBAR (FinCEN Form 114), which requires reporting of foreign financial accounts exceeding USD 10,000 in aggregate. A Hong Kong bank account holding rental income from a US property must be reported on the FBAR.

The FATCA Form 8938 (Specified Foreign Financial Assets) requires reporting of specified foreign financial assets exceeding USD 50,000 for single filers (USD 100,000 for married filing jointly) who live abroad. A Hong Kong holding company that owns US real estate is a specified foreign financial asset, and its value is the fair market value of the US property. Failure to file Form 8938 can result in a penalty of USD 10,000, with additional penalties of up to USD 50,000 for continued failure (IRC § 6038D(d)).

The PRC’s CRS Implementation and the 2025 Data Match

The PRC has been exchanging CRS data with Hong Kong since 2018. The 2025 data match cycle, completed in January 2025, focused on Hong Kong residents holding PRC property through Hong Kong companies. The PRC tax authorities have cross-referenced CRS data with land registry records to identify undisclosed beneficial owners. For Hong Kong investors who have not declared PRC property income on their PRC IIT returns (if they are PRC tax residents) or on their Hong Kong tax returns (if the property is held through a Hong Kong company that is subject to Hong Kong profits tax), the risk of audit has increased materially.

The IRD’s 2024 field audit programme included 120 targeted audits of Hong Kong companies holding PRC property, resulting in additional tax assessments of HKD 1.8 billion (IRD Annual Report 2023-24). The IRD’s focus is on the characterisation of the property holding—whether it is held as a capital asset or as trading stock—and the application of the source principle.

Actionable Takeaways

1. Verify the DTA coverage for each property jurisdiction: Hong Kong’s DTAs with the UK, Australia, and Mainland China all follow the OECD model on Article 6, but the domestic implementation of source-state taxing rights varies—for example, the UK’s NRCGT rate of 24% for individuals versus Australia’s 12.5% withholding tax on disposals.

2. Review the 2025 OECD clarification on tokenised property: If your family office holds tokenised real estate interests, confirm that the fund’s tax structure accounts for the source state’s taxing right under the revised Article 6 commentary, and that the offering documents comply with the SFC’s 2024 circular.

3. Assess CFC exposure for offshore holding companies: The IRD’s 2024 CFC guidance requires active management of property held through BVI or Cayman companies to avoid the CFC charge on passive income—ensure that the property is used in a trade or business with documented operational activity.

4. File all required US reporting forms: For US citizens or Green Card holders, ensure FBAR (FinCEN Form 114) and FATCA Form 8938 are filed annually, and that the Hong Kong holding company’s value is correctly reported as the fair market value of the underlying US property.

5. Prepare for PRC CRS data matches: If you hold PRC property through a Hong Kong company, ensure that the beneficial ownership is correctly declared to the IRD and that any PRC IIT obligations are met, particularly in light of the 2025 data match cycle.

Disclaimer: 本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.