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Tracking Bilateral DTA Updates: Hong Kong's Latest Signed Agreements and Protocols

2025-12-23 · 11 min read
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The Inland Revenue Department (IRD) released its annual report for the 2024-25 fiscal year in October 2025, revealing that the number of comprehensive double taxation agreements (CDTAs) signed or awaiting ratification by Hong Kong has reached 50, a net increase of two from the previous year. This expansion occurs against a backdrop of the OECD’s Base Erosion and Profit Shifting (BEPS) 2.0 implementation and the impending global minimum corporate tax rate of 15% under Pillar Two, set to take effect in Hong Kong for fiscal years beginning on or after 1 January 2025. For Hong Kong tax residents—particularly family offices and mid-cap CFOs with cross-border operations—each new protocol or agreement alters the calculus for withholding tax rates, permanent establishment (PE) risk, and treaty-shopping opportunities. The IRD’s 2025 report (Inland Revenue Department Annual Report 2024-25, October 2025) confirms that negotiations with Saudi Arabia, Bangladesh, and the United Arab Emirates are at an advanced stage, while protocols with Malaysia and Thailand have been signed but not yet entered into force. This article examines the substantive changes in Hong Kong’s latest bilateral treaty updates, the implications for U.S. persons and Mainland China residents, and the operational steps tax counsel should take before year-end.

The Malaysia-Hong Kong Protocol: Revised Withholding Rates and PE Thresholds

The Protocol amending the Agreement between the Government of Malaysia and the Government of the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income was signed on 12 March 2025. As of October 2025, the Protocol has not yet entered into force; it will take effect once both parties have completed their domestic ratification procedures, with the IRD indicating a likely effective date of 1 January 2026 for Hong Kong.

Dividend Withholding Tax: Reduced to 0% for Substantial Holdings

Under the original 2012 Malaysia-Hong Kong DTA, the withholding tax rate on dividends was capped at 5% if the beneficial owner held at least 25% of the paying company’s capital, and 10% in all other cases. The 2025 Protocol reduces the 5% threshold to 0% for dividends paid to a company that holds at least 25% of the capital of the paying company for a 365-day period ending on the date of entitlement. This aligns with the OECD Model Tax Convention on Income and on Capital (2017) Article 10(2)(a), which permits a 0% rate for such holdings. For Hong Kong tax residents, this means that a Hong Kong holding company receiving dividends from a Malaysian subsidiary—provided the 25% ownership test is met—will face zero Malaysian withholding tax, compared to the previous 5% rate. The 365-day holding period requirement is a critical compliance point; tax counsel should ensure that the holding period is documented and that any restructuring does not inadvertently break the continuity.

Interest and Royalty Withholding: No Change, but PE Article Tightened

The Protocol leaves the interest withholding tax rate at 15% and the royalty rate at 10% unchanged. However, the PE article (Article 5) has been amended to lower the threshold for a construction or installation project to constitute a PE from 12 months to 9 months. This mirrors the OECD BEPS Action 7 recommendation to prevent artificial avoidance of PE status. For Hong Kong contractors operating in Malaysia—particularly in infrastructure and engineering—a project exceeding 9 months will now trigger a Malaysian PE, exposing the Hong Kong enterprise to taxation on profits attributable to that PE under Article 7. The IRD’s Departmental Interpretation and Practice Notes (DIPN) No. 44 (Revised) on PE determination, issued in 2023, provides guidance on how Hong Kong will treat such PE findings, but the Malaysian tax authority’s interpretation may differ. Tax counsel should review existing project contracts and consider whether to restructure delivery models to avoid crossing the 9-month threshold.

Mutual Agreement Procedure and Arbitration

The Protocol introduces a mandatory binding arbitration clause for cases where the competent authorities fail to reach an agreement within two years of a Mutual Agreement Procedure (MAP) request. This is a significant procedural enhancement, as the original DTA contained no arbitration provision. For U.S. persons living in Hong Kong who also have Malaysian-source income, the arbitration clause provides a backstop mechanism to resolve dual-residency or transfer pricing disputes without resorting to litigation. The IRD’s 2025 annual report notes that MAP cases involving Malaysia have historically taken an average of 3.5 years to resolve; the new arbitration clause is expected to reduce this to under two years.

The Thailand-Hong Kong Protocol: Capital Gains and Exchange of Information Updates

The Protocol amending the Agreement between the Government of the Hong Kong Special Administrative Region and the Government of the Kingdom of Thailand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income was signed on 14 May 2025. Like the Malaysia Protocol, it is not yet in force; the IRD expects an effective date of 1 January 2026 for Hong Kong.

Capital Gains: Alignment with OECD Standards

The original 2005 Thailand-Hong Kong DTA provided for capital gains taxation only in the country of residence of the alienator, with no specific carve-out for immovable property companies. The 2025 Protocol introduces a new Article 13(4) that allows the source country (Thailand) to tax gains from the alienation of shares deriving more than 50% of their value from immovable property situated in that country. This aligns with the OECD Model Article 13(4) and the Multilateral Instrument (MLI) Article 9(1). For Hong Kong family offices holding Thai real estate through a special purpose vehicle (SPV), a disposal of the SPV shares will now trigger Thai capital gains tax, even if the SPV is incorporated in Hong Kong or a third jurisdiction like the BVI. The IRD’s DIPN No. 48 (2024) on the taxation of offshore gains provides limited relief, as the source rule under the Protocol will override Hong Kong’s territorial principle. Tax counsel should conduct a valuation analysis of the SPV’s asset composition to determine whether the 50% threshold is met, and consider restructuring the holding to reduce immovable property exposure below the threshold.

Exchange of Information: Expanded to Include Automatic Exchange

The original DTA’s exchange of information (EOI) article (Article 26) was limited to exchange upon request. The 2025 Protocol expands this to include automatic exchange of information (AEOI), effective from 1 January 2027 for information relating to 2026. This brings the Thailand-Hong Kong relationship into line with the OECD Common Reporting Standard (CRS), which Hong Kong has implemented since 2017 under the Inland Revenue Ordinance (Cap. 112) Section 80A. For U.S. persons living in Hong Kong, the AEOI provision does not directly affect them, as the US-HK Tax Information Exchange Agreement (TIEA) signed in 2014 already provides for exchange upon request. However, for Hong Kong residents with Thai financial accounts, the AEOI means that account information—including balances, interest, and dividends—will be automatically reported to the Thai Revenue Department starting in 2027. This has implications for Thai tax residents who may have undisclosed Hong Kong accounts; the IRD has indicated it will cooperate fully with Thai authorities under the Protocol.

Limitation on Benefits: Anti-Treaty Shopping Clause

The Protocol introduces a Limitation on Benefits (LOB) clause, which restricts treaty benefits to residents who meet a “qualified person” test. To qualify, a Hong Kong resident must either be an individual, the Hong Kong government, or a company that is listed on a recognised stock exchange (including the Stock Exchange of Hong Kong) and whose shares are substantially and regularly traded. For non-listed companies, the LOB clause requires that more than 50% of the beneficial interests be held by qualified persons, and that the company’s income is not used to meet substantial liabilities to non-qualified persons. This is a direct response to BEPS Action 6, which identifies treaty shopping as a key concern. For Hong Kong family offices using BVI or Cayman holding companies to invest in Thailand, the LOB clause will block treaty benefits unless the ultimate beneficial owners are Hong Kong tax residents. The IRD’s guidance on LOB clauses, published in DIPN No. 52 (2025), recommends that taxpayers maintain a “beneficial ownership register” to demonstrate compliance.

The Mainland China-Hong Kong Arrangement: Protocol 5 and the 2025 Update

The Fifth Protocol to the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income was signed on 29 August 2025 and entered into force on 1 October 2025. This is the most consequential update for Hong Kong tax residents with Mainland exposure.

Reduced Withholding Tax on Dividends for Listed Companies

Protocol 5 reduces the withholding tax rate on dividends paid by a Mainland resident company to a Hong Kong resident company from 5% to 3%, provided the Hong Kong company holds at least 25% of the capital of the Mainland company for a 365-day period ending on the date of entitlement. This is a reduction from the 2016 Fourth Protocol, which had already lowered the rate from 10% to 5%. The 3% rate applies to dividends paid on or after 1 January 2026. For Hong Kong-listed companies with Mainland subsidiaries, this represents a direct cash flow benefit. The State Administration of Taxation (SAT) issued Circular 2025/45 on 15 September 2025, clarifying that the 365-day holding period is calculated from the date of acquisition of the shares, not the date of the dividend declaration. Tax counsel should ensure that shareholding records are maintained to evidence the holding period.

Expanded PE Definition for Service Enterprises

The PE article in the Mainland-Hong Kong Arrangement has been amended to lower the threshold for a service PE from 183 days to 90 days in any 12-month period. This applies to enterprises providing services—including consultancy, management, and technical services—through employees or other personnel in the Mainland. The 90-day threshold aligns with the OECD Model Article 5(3)(b) and the MLI Article 12. For Hong Kong professional services firms—such as accounting, legal, and engineering firms—deploying staff to the Mainland for a project exceeding 90 days will now trigger a Mainland PE. The IRD’s DIPN No. 44 (Revised) provides a “days of presence” calculation methodology, but the SAT has its own interpretation in Circular 2025/48, which counts any part of a day as a full day. Tax counsel should implement a tracking system for employee days spent in the Mainland and consider whether to structure service contracts through a Mainland subsidiary to manage PE risk.

Tax Sparing Credit: Extended for Five Years

Protocol 5 extends the tax sparing credit provision for another five years, until 31 December 2030. Under this provision, a Hong Kong resident that receives income from the Mainland which is exempt from or subject to reduced tax under Mainland tax incentives (e.g., the High and New Technology Enterprise (HNTE) 15% rate) may claim a tax credit in Hong Kong for the tax that would have been payable had the incentive not applied. This is particularly relevant for Hong Kong investors in Mainland HNTE companies, as the effective Hong Kong tax rate on such income can be reduced to near zero. The IRD’s DIPN No. 47 (2024) on foreign tax credits provides the computational framework. Tax counsel should review existing Mainland investment structures to ensure that the tax sparing credit is being claimed, as the IRD has a six-year statute of limitations for amending tax returns under Inland Revenue Ordinance (Cap. 112) Section 82A.

Implications for U.S. Persons and Family Offices

For U.S. citizens and Green Card holders living in Hong Kong, the bilateral treaty updates interact with the U.S. worldwide taxation regime under IRC § 61. The reduced withholding tax rates under the Malaysia and Thailand Protocols may reduce foreign tax credits available under IRC § 901, but the overall U.S. tax liability may increase if the foreign tax credit limitation under IRC § 904 applies. Specifically, the passive category income limitation under IRC § 904(d)(1)(A) may limit the credit for dividends taxed at 0% under the Malaysia Protocol. For family offices using BVI or Cayman holding companies, the LOB clauses in the Thailand Protocol and the expanded PE definitions in the Mainland Protocol require a review of the “substance over form” analysis under IRC § 7701(o) (the economic substance doctrine). The IRS has increased examination of cross-border arrangements under its Large Business and International (LB&I) division, with a 2025 campaign targeting “treaty shopping structures” (IRS LB&I Directive 2025-03, 15 March 2025). Tax counsel should ensure that any Hong Kong entity claiming treaty benefits has sufficient substance—including office space, employees, and decision-making functions—to satisfy both the treaty’s LOB clause and the IRS’s economic substance standard.

Actionable Takeaways

  • Review all cross-border investment structures involving Malaysia, Thailand, and Mainland China to assess whether the new PE thresholds (9 months for Malaysia, 90 days for Mainland) require restructuring of service delivery models or project contracts.
  • For Hong Kong holding companies receiving dividends from Malaysia or Mainland China, ensure that the 365-day holding period for the 0% or 3% withholding rate is documented and that any share acquisitions or disposals do not break the continuity.
  • For family offices holding Thai real estate through SPVs, conduct a valuation analysis to determine whether the 50% immovable property threshold is met, and consider restructuring to avoid Thai capital gains tax on disposal.
  • For U.S. persons living in Hong Kong, compute the impact of reduced foreign tax credits under IRC § 904 and consider whether to accelerate dividend receipts before the new treaty rates take effect.
  • Implement a days-of-presence tracking system for employees and partners travelling to Mainland China and Malaysia to avoid triggering a PE, and review existing MAP cases to determine whether the new arbitration clauses apply.

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.

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