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Second Protocol to the Arrangement for the Avoidance
of Double Taxation signed with the Mainland
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The Secretary for Financial Services and the Treasury, Professor
K C Chan, signed the Second Protocol to the Arrangement for the
Avoidance of Double Taxation and Prevention of Fiscal Evasion with
respect to Taxes on Income with the Mainland with the Deputy Commissioner
of the State Administration of Taxation, Mr Wang Li, in Beijing
today (January 30).
The Arrangement for the Avoidance
of Double Taxation and Prevention of Fiscal Evasion with respect
to Taxes on Income between the Mainland and Hong Kong (including
the protocol) was formally signed on August 21, 2006. The arrangement
entered into force on December 8, 2006.
The Mainland and Hong Kong had different
views on the interpretation of some of the articles upon implementation
of the arrangement. After negotiation, both sides reached agreement
on the necessary amendments to the agreement and initialled the
second protocol as well as exchanged letters (annex) on September
11, 2007. At the same time, the new Enterprise Income Tax Law of
the Mainland came into effect on January 1, 2008. Corresponding
adjustment of the relevant articles of the arrangement had to be
made in respect of tax types involved and the definition of a "resident".
In determining whether a Hong Kong
enterprise providing services, including consulting services, in
the Mainland is liable to the Enterprise Income Tax, both sides
have now agreed to substitute "183 days" for "six
months" as the basis of calculation.
In other words, Hong Kong enterprises
would be considered as having a permanent establishment on the Mainland
and be chargeable to tax if they provide services for an aggregate
of 183 days in any 12-month period on the Mainland. The meaning
of "month" was subject to different interpretations previously,
for example the provision of services for only a few days within
one calendar month on the Mainland might be counted as one month.
The use of "day" in the present definition is clear and
simple.
Apart from some specified transactions
in the arrangement and the second protocol, the gains derived by
a Hong Kong resident from the alienation of immovable assets should
be taxable in Hong Kong only.
These specified transactions include
alienation of a certain type of shares. The gains derived by a Hong
Kong resident from the alienation of shares in a Mainland company
may be taxed on the Mainland, if this company once owned at least
50% of immovable properties within three years prior to the alienation
transaction. Furthermore, the gains derived by a Hong Kong resident
from the alienation of shares, irrespective of the number of shares
involved, in a Mainland company may be taxed on the Mainland, if
within 12 months prior to the alienation transaction the vendor
once owned not less than 25% of the entire shareholding of this
Mainland company.
Investors can now estimate their
tax liabilities with increased certainty as the second protocol
has specified "three years" and "12 months"
as the reference period in the implementation of the articles of
the arrangement.
Hong Kong has entered into avoidance
of double taxation arrangement/agreements (DTA) with the Mainland
and other jurisdictions (including Belgium, Thailand, Luxembourg).
This is the first occasion on which amendments are made to the articles
of a DTA by signing a protocol, which is considered to be an important
move in the proper implementation of a DTA.
During the day, Professor Chan and
the Commissioner of Inland Revenue, Mrs Alice Lau, paid a courtesy
call on the Commissioner of State Administration of Taxation, Mr
Xiao Jie, and they exchanged views on issues of mutual concern.
Professor Chan and Mrs Lau also visited the Beijing Municipal Office,
State Administration of Taxation, to familiarise themselves with
the work of the office.
Ends/Wednesday, January 30, 2008
Issued at HKT 17:12
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Please click
here for the Annex.
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