In late February Hong Kong's Secretary for Financial Services and the Treasury, Professor K C Chan and Jersey's Chief Minister, Senator Ian Gorst, signed a compensative Double Taxation Treaty ("DTA"). The DTA will become effective upon each of the governments of Hong Kong and Jersey ratifying the agreement.
This is the 23rd DTA signed by Hong Kong and the 3rd by Jersey and it is the first DTA that Hong Kong has signed with a leading international offshore financial centre and, as such, is a significant development for both Hong Kong and Jersey. The DTA is based on the Organisation for Economic Co-operation and Development's (the "OECD") Model Agreement on exchange of information for tax relation matters. Apart from provisions dealing with the exchange of tax information, the DTA also sets out the allocation of taxation rights between Hong Kong and Jersey and tax relief available to both personal and corporate incomes in relation to activities such as profits, dividends, interest, royalties, salary and pension income.
The Hong Kong / Jersey Relationship
While Jersey, through Jersey Finance, has had a presence in Hong Kong since 2009, Jersey companies have been involved in transactions with Hong Kong and Chinese counterparties investment avanues and targets for many years. Both Jersey and Hong Kong are seen as gateways to bigger markets; Jersey to London and by extension to the EU; and Hong Kong to China. Chinese companies have historically used Jersey as a gateway into the UK and Europe, for instance, 25% of Chinese companies that have listed in London (LSE or AIM) have done so using a Jersey vehicle. Further, nearly US$11 billion of banking deposits in Jersey derive from the Far East. More recently companies incorporated in Jersey have started listing on the Stock Exchange of Hong Kong, with a view to expanding into China and accessing the capital available in North Asia.
The Implications
The positive commercial and political implications f lowing from the DTA to both Hong Kong and Jersey should not be discounted. The OECD Model Agreement as a legal instrument is used to establish effective exchange of information and thereby to curb harmful tax practises.
The entry into the DTA by Hong Kong and Jersey will provide comfort to investors, wherever geographically they may be based, to continue to invest via Jersey vehicles. Further, due to Hong Kong's role within China as its premier financial centre, the entering into the DTA is likely to reap positive economic activity for Jersey. In addition, the fact that this, the 3rd DTA (along with 27 TIEA's also signed) entered into by Jersey, gives credence to Jersey's best efforts to address harmful tax practises.
The Opportunities & the Future
Geoff Cook, chief executive, Jersey Finance, Jersey's promotional body has said: "That China's GDP is expected to continue to grow at around 8% reaffirms that there are clear opportunities for Jersey to grow its private wealth management business through its specialist trust and foundation structures and popular banking services. Jersey's flexible company structures also continue to be attractive as capital market activity in Hong Kong accelerates. In all these areas, this DTA will add significantly to the reasons for investors and institutions to have confidence in and choose Jersey as their preferred European financial centre to invest in Western markets."
Zhaoan Li, Jersey Finance's Head of Business Development Greater China and based in Hong Kong, added: "The signing of the agreement comes at a time when a number of Jersey legal and financial services firms are opening offices in Hong Kong, which is fantastic news. Demonstrating a commitment like this to doing business is absolutely vital in the Hong Kong market, so this agreement is really important not just in a technical sense but also because it underpins Jersey's commercial relationship with Hong Kong too."
Appleby has seen an increasing workflow for Jersey-related matters involving Asian clients and has the unique ability to assist clients on such matters from both its Jersey and Hong Kong offices. Recently the Appleby Jersey and Hong Kong offices advised the Aluminum Corporation of China ("Chinalco") in its US$1.35 billion JV with Rio Tinto covering the development and operation of the Simandou iron ore project in Guinea, a deal that won the Energy and Resources Deal of the Year at the ALB China 2011 law awards.
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