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Double taxation arrangement signed with the Mainland
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The Central People's Government and
the Hong Kong Special Administrative Region Government today (August
21) signed the Arrangement for the Avoidance of Double Taxation
on Income and Prevention of Fiscal Evasion.
The new arrangement extends the scope
of the original agreement on business profits and income from personal
services signed by both parties in 1998. It covers direct income
earned by businesses and individuals (such as operating profits
and employment income) as well as indirect income (such as dividends,
interest and royalties) and ensures that the same income will not
be doubly taxed in the two tax jurisdictions.
The Minister of the State Administration
of Taxation, Mr Xie Xuren, signed the new arrangement on behalf
of the Central Government. The Chief Executive, Mr Donald Tsang,
accompanied by the Financial Secretary, Mr Henry Tang, and the Secretary
for Financial Services and the Treasury, Mr Frederick Ma, signed
on behalf of Hong Kong.
Speaking at the signing ceremony,
Mr Tsang said that given the close economic ties between the Mainland
and Hong Kong, an arrangement that provided certainty and preferential
tax treatment would enable businesses and individuals to better
assess their investment positions and foster closer investment and
trade links between the two places.
"The conclusion of a comprehensive
double taxation arrangement with the Mainland, together with the
CEPA (Mainland and Hong Kong Closer Economic Partnership Arrangement),
will provide added incentives for international investors to enter
the Mainland market through Hong Kong. It will also enhance cross-border
financing arrangements and the transfer of technical know-how and
patent rights between the two places. These will help promote Hong
Kong's economy, enhance our competitiveness and attract overseas
capital," Mr Tsang said.
The Financial Secretary, Mr Henry
Tang, explained details of the new arrangement to the media after
the signing ceremony.
Under the new arrangement:
* Top rates for withholding tax for
dividends received by a Hong Kong resident from investments in Mainland
enterprises will be reduced from 20% to 10%, and a Hong Kong business
from 10% to 5% if the Hong Kong business holds at least 25% of the
capital of the Mainland enterprise. This will attract more overseas
investments into the Mainland through Hong Kong.
* Top rates for withholding tax for
interest received by a Hong Kong resident from the Mainland will
be reduced from 20% to 7%, and a Hong Kong business from 10% to
7%. This will benefit Hong Kong investors and reinforce the status
of Hong Kong as an international financial centre.
* Top rates for withholding tax for
royalties received by a Hong Kong resident and a Hong Kong business
from the Mainland will also be reduced from the respective 20% and
10% to 7%. This will help promote creativity and innovation in industry
as well as cultural and artistic activities on the Mainland and
Hong Kong.
* The taxing right for gains received
by a Hong Kong resident or a Hong Kong business from the transfer
of shares in a Mainland enterprise is allocated exclusively to Hong
Kong. If the income does not amount to a trading receipt or is not
sourced in Hong Kong, no profits tax will be charged in Hong Kong.
In the case where the assets of the Mainland enterprise are comprised
mainly of immovable property situated on the Mainland or the shares
transferred are equal to or exceed 25% of the shareholding of the
Mainland enterprise, the income may be taxed in both jurisdictions.
However, a tax credit arrangement will effectively ensure that the
same income will not be taxed twice.
In accordance with the international
norm, the new arrangement contains an article on the exchange of
information between the State Administration of Taxation and the
Hong Kong Inland Revenue Department. This is essential to enable
both parties to carry out the provisions of the new arrangement.
However, the information to be exchanged is limited to information
that is necessary for carrying out the provisions of the domestic
laws concerning taxes covered by the new arrangement to ensure that
the use of taxpayer information will not be abused.
The new arrangement will take effect
after the completion of ratification procedures for both sides.
In the case of Hong Kong, an order is required to be made by the
Chief Executive in Council under the Inland Revenue Ordinance. The
order is subject to negative vetting by the Legislative Council.
Subject to the completion of ratification procedures by both parties
before December 31, 2006, the new arrangement will take effect with
respect to Hong Kong taxes from the year of assessment beginning
on or after April 1, 2007, and with respect to Mainland taxes from
the taxable year beginning on or after January 1, 2007.
Details of the new arrangement can
be found at the Inland Revenue Department website, http://www.ird.gov.hk/eng/pdf/dta_china_new_arrangement.pdf.
Ends/Monday, August 21, 2006
Issued at HKT 13:05
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