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23-Mar-2010

Hong Kong signs comprehensive agreement with Indonesia on avoidance of double taxation This is the eighth comprehensive agreement for the avoidance of double taxation (CDTA) concluded by Hong Kong. It will eliminate double taxation instances encountered by Hong Kong and Indonesian investors, and bring about tax savings and certainty in tax liabilities in connection with cross-border economic activities. In the absence of the CDTA, profits of Indonesian companies doing business through a permanent establishment, such as a branch, in Hong Kong are fully taxed in both places. Under the CDTA, double taxation is avoided in that any Hong Kong tax paid by Indonesian companies shall be allowed as a deduction from the tax payable in respect of the same income in Indonesia. In the absence of a CDTA, Hong Kong residents receiving dividends from Indonesia not attributable to a permanent establishment there are subject to an Indonesian withholding tax, which is currently at 20%. Under the agreement, this will be reduced to 10%. If the recipient is a company holding at least 25% of the share capital of the paying company, the withholding tax rate will be further reduced to 5%. Also, Hong Kong residents receiving royalties from Indonesia are subject to a current withholding tax of 20% in Indonesia. Under the agreement, the royalties withholding tax will be capped at 5%. The Indonesian interest withholding tax on Hong Kong residents will be reduced from the current rate of 20% to 10%. The Hong Kong/Indonesia CDTA will come into force after the completion of ratification procedures on both sides. Details of the Hong Kong/Indonesia CDTA can be found on the Inland Revenue Department's website (www.ird.gov.hk/eng/pdf/Agreement_Indonesia_HongKong.pdf).