Hong Kong may become new FII hotspot
India and the island city have agreed on a new double-tax avoidance treaty, which is likely to be notified soon
Global financial hub Hong Kong is likely to emerge as the new gateway for overseas investors looking to invest in India, pipping traditional destinations such as Singapore and Mauritius.
According to sources, India and Hong Kong have agreed on a new double-tax avoidance agreement (DTAA), which is likely to be notified soon.
The terms of the agreement provide investments from Hong Kong privileges on a par with Singapore and Mauritius. But, unlike the latter two, compliance with the tax avoidance laws is easy for funds coming from Hong Kong as a majority of them already have a proper business set-up in the jurisdiction.
Industry estimates suggest close to half of the inflows coming into India are domiciled in Hong Kong. But, due to the absence of any tax arrangement, they route their trades from a different jurisdiction. Unlike India, jurisdictions such as Singapore allow traders to route their orders from their country even if the actual entity is not stationed there.
Although the agreement has been under process for a few years now, no progress could be made as Hong Kong wanted a tax treatment on a par with Mauritius or Cyprus, where capital gains and derivative trades were exempted from the tax net. After India’s renegotiations of the DTAAs with these tax-friendly countries, the agreement with Hong Kong is seen as a breakthrough.
“The Cabinet has already given its nod for the agreement and the final deal is expected to be signed in the next twothree months. Industry has been seeking such an arrangement for a long time now as Hong Kong cannot be treated on a par with China, with whom India has an agreement. This new treaty would certainly provide a boost for investments coming from Hong Kong,” a source said.
Market participants say the treaty is a win-win situation for both investors and the governments. On one hand, the investors will no longer be required to create special purpose vehicles (SPVs) via other jurisdictions such as Mauritius to invest in India. Further, the Asian operations of a majority of foreign institutional investors (FIIs) are headquartered in Hong Kong. Hence they have a proper set-up with employees and offices in Hong Kong. This could make compliance with anti-avoidance laws such as General Anti-Avoidance Rules (GAAR) and OECD Multi-lateral Instruments (MLIs) much easier.
“Having a tax agreement with Hong Kong would be welcome for Indian tax authorities as it cultivates more information sharing between both the governments. On the other hand, the investors would also be happy as they can invest in India directly and not fear provisions such as GAAR. Also, the domestic laws in Hong Kong are strong, unlike jurisdictions like Mauritius,” said Siddharth Shah, partner, Khaitan & Co.
The tax and regulatory framework around FII investments has witnessed a drastic change in the past two years. To begin with, the Indian government has renegotiated tax treaties with several jurisdictions including Singapore, Mauritius and Cyprus. Unlike in the past, none of the new treaties have lenient tax arrangements and all the loopholes that gave arbitrage opportunities to the investors have been plugged.
“Going by the current government’s track record, FIIs have come to terms with the reality that there will be no tax havens. Even if there are any loopholes in any of the agreements, the Indian government will plug them. Further, India has become an important market for FIIs these days and hence tax arbitrage is not their priority any longer,” said Tejesh Chitlangi, partner, IC Universal Legal.