New Delhi: India and Hong Kong on Monday entered into a double taxation avoidance agreement, aiming to facilitate investment flow between both countries and prevent tax evasion.

“The agreement will stimulate flow of investment, technology and personnel from India to HKSAR (Hong Kong Special Administrative Region) and vice versa, prevent double taxation and provide for exchange of information between the two contracting parties. It will improve transparency in tax matters and help curb tax evasion and tax avoidance," the tax department said in a statement.

Investors will get an advantage of a lower withholding tax of 10% on interest or royalties provided they fulfil the main purpose test which broadly checks that the transaction is not entered 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% of its value from property situated in a country will be taxed in that country.

Abhishek Goenka, partner and leader-corporate and international tax, PwC said in a note that the treaty was important.

“Hong Kong is an important financial and trading partner and the absence of a treaty was a hindrance. While there are no major sops, the rate of 10% withholding on interest stands out. Similarly, there are exemptions for airline and shipping companies. There is also some relief on capital gains tax where values of companies are not derived more than 50% from real estate. The treaty will also facilitate better exchange of information and tax cooperation," he said in a note.

Rakesh Nangia , managing partner, Nangia & Co. LLP, said the agreement will 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.

“Interestingly, the BEPS (base erosion and profit shifting) inspired anti-abuse measures have found place in the DTAA with Hong Kong since both the jurisdictions are signatories to the Multilateral Instrument under BEPS," he added.

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