(Source : news.gov.hk)
Double taxation arrangement signed with the Mainland
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