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Print articleChina: New Tax Arrangement between the Mainland and Hong Kong
January, 2007 -
The Central Government of the People’s Republic of China (“Mainland”) and the Government of the Hong Kong Special Administrative Region (“Hong Kong”) jointly issued the Arrangement between the Mainland and Hong Kong for the Avoidance of Double Taxation on Income and the Prevention of Fiscal Evasion on 21 August 2006. The Arrangement replaces the previous double taxation arrangement when it becomes effective on 1 January 2007 in the Mainland and on 1 April 2007 in Hong Kong and covers both direct and indirect income.
Definitions
The Arrangement provides definitions for “resident” and “permanent establishment” for tax purposes, as well as a test for determining residency. A resident of the Mainland is defined as any person (individual, company, trust or partnership) who is liable to tax on the Mainland, except those liable to tax only in respect to earning income from Mainland sources. A resident of Hong Kong is defined as a person who ordinarily resides in Hong Kong and stays there for more than 180 days over one year or more than 300 days over two years, a company (body corporate) incorporated or normally managed and controlled in Hong Kong or any entity constituted or managed and controlled in Hong Kong. If an individual is a resident of both Hong Kong and the Mainland, his residency shall be where he has a permanent home or where his closest economic and personal ties are.
Dividends, Interest, Royalties
To date, dividends paid to foreign investors in foreign investment enterprises on the Mainland (“FIEs”) are not subject to withholding tax. The Agreement provides for the dividend rates that would be applicable to Hong Kong investors in FIEs in the event such exemption is revoked. The rates under the Agreement are very low and range from 5%, if the beneficiary is a company holding at least 25% of the FIE’s capital, to 10%.
Interest payable from the Mainland may be taxed at a rate not exceeding 7%, while interest income received from the government or other recognised institutions is exempt from tax.
Royalties remitted from the Mainland may similarly be taxed in the Mainland at a rate not exceeding 7%.
Capital Gains
Under the Arrangement, capital gains realised by a Hong Kong investor from the sale of shares in an FIE may be taxed if the shares sold account for more than 25% of the FIE’s registered capital and the FIE’s assets do not consist mainly of immovable property.
Individuals
If they fulfil several criteria, individuals who are residents of one side may be exempt from taxes on remunerations or receive a tax credit. In order to be fully exempt from the taxes on remuneration of one side when one is a resident of the other or to receive a tax credit, the resident must:
• not spend more than 183 days in the other side over a twelve-month period;
• be paid by or on the behalf of his employer of the first side;
• not be paid by a permanent establishment that his employer has on the other side.
Therefore, in order for a resident of Hong Kong to be exempt from Mainland taxes on remuneration, he can only spend a maximum of 183 days on the Mainland over the course of twelve months and must be paid by his Hong Kong-based employer from their Hong Kong-based establishment.
Exchange of information
The Arrangement provides that the relevant authorities may exchange information necessary to prevent tax evasion and carry out the provisions of the Arrangement. Neither side is to disclose any information that cannot be obtained under the normal laws nor any information that may disclose trade, business, industrial, commercial or professional secrets.
Definitions
The Arrangement provides definitions for “resident” and “permanent establishment” for tax purposes, as well as a test for determining residency. A resident of the Mainland is defined as any person (individual, company, trust or partnership) who is liable to tax on the Mainland, except those liable to tax only in respect to earning income from Mainland sources. A resident of Hong Kong is defined as a person who ordinarily resides in Hong Kong and stays there for more than 180 days over one year or more than 300 days over two years, a company (body corporate) incorporated or normally managed and controlled in Hong Kong or any entity constituted or managed and controlled in Hong Kong. If an individual is a resident of both Hong Kong and the Mainland, his residency shall be where he has a permanent home or where his closest economic and personal ties are.
Dividends, Interest, Royalties
To date, dividends paid to foreign investors in foreign investment enterprises on the Mainland (“FIEs”) are not subject to withholding tax. The Agreement provides for the dividend rates that would be applicable to Hong Kong investors in FIEs in the event such exemption is revoked. The rates under the Agreement are very low and range from 5%, if the beneficiary is a company holding at least 25% of the FIE’s capital, to 10%.
Interest payable from the Mainland may be taxed at a rate not exceeding 7%, while interest income received from the government or other recognised institutions is exempt from tax.
Royalties remitted from the Mainland may similarly be taxed in the Mainland at a rate not exceeding 7%.
Capital Gains
Under the Arrangement, capital gains realised by a Hong Kong investor from the sale of shares in an FIE may be taxed if the shares sold account for more than 25% of the FIE’s registered capital and the FIE’s assets do not consist mainly of immovable property.
Individuals
If they fulfil several criteria, individuals who are residents of one side may be exempt from taxes on remunerations or receive a tax credit. In order to be fully exempt from the taxes on remuneration of one side when one is a resident of the other or to receive a tax credit, the resident must:
• not spend more than 183 days in the other side over a twelve-month period;
• be paid by or on the behalf of his employer of the first side;
• not be paid by a permanent establishment that his employer has on the other side.
Therefore, in order for a resident of Hong Kong to be exempt from Mainland taxes on remuneration, he can only spend a maximum of 183 days on the Mainland over the course of twelve months and must be paid by his Hong Kong-based employer from their Hong Kong-based establishment.
Exchange of information
The Arrangement provides that the relevant authorities may exchange information necessary to prevent tax evasion and carry out the provisions of the Arrangement. Neither side is to disclose any information that cannot be obtained under the normal laws nor any information that may disclose trade, business, industrial, commercial or professional secrets.
