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Avoidance of Double Taxation between Hong Kong and the Chinese Mainland

In the levying of tax on incomes derived by individuals and FIEs from sources outside the territory of China, there may be cases where such incomes have already been taxed in the source country or region. In order to avoid double taxation and to prevent tax evasion, the mainland and Hong Kong have signed the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (“the Arrangement”) to ensure that the same income, whether direct or indirect income, will not be taxed twice.

Existing Taxes Covered by the Arrangement

(a)  Chinese Mainland

  • Individual income tax

  • Foreign-invested enterprise income tax and foreign enterprise income tax 

(b)  Hong Kong

  • Profit tax

  • Salaries tax

  • Property tax

Definition of Hong Kong “Resident” in the Arrangement

  • An individual who ordinarily resides in Hong Kong, i.e. an individual who has a permanent home in Hong Kong available to him and his family.

  • An individual who stays in Hong Kong for more than 180 days during a year of assessment or for more than 300 days in two consecutive years of assessment (one of which being a relevant year of assessment), i.e. an individual who works and resides temporarily in Hong Kong.

  • A Hong Kong corporate resident, i.e. a company incorporated in Hong Kong (including a company with incorporation status); or a company incorporated outside Hong Kong but normally managed or controlled in Hong Kong, i.e. the overall management of the company’s daily business and operations, the execution of management decisions, or the making of management decisions by the board of directors, are carried out in Hong Kong. (For example, if the Hong Kong branch office of a foreign bank is not responsible for the management of the bank’s overall operations and the making of the bank’s decisions, it will not be entitled to the treatment of a Hong Kong resident under the Arrangement.)

Avoidance of Double Taxation

(a)  The maximum rate of withholding tax on dividends received by Hong Kong residents from investing in mainland enterprises is reduced to 10% from the previous rate of 20%.

(b)  For Hong Kong companies holding not less than 25% of the shares of the mainland company which pays the dividends, the maximum rate of withholding tax on dividends is reduced to 5%.

(c)  The maximum rate of withholding tax on interest received by Hong Kong residents and enterprises from sources in the mainland is reduced to 7% of the total interest.

(d)  The maximum rate of withholding tax on royalties received by Hong Kong residents and enterprises from sources in the mainland is also reduced to 7% of the gross amount of royalties.

(e)  The right to impose tax on capital gains derived by Hong Kong residents and enterprises from the transfer of shares of mainland companies rests with Hong Kong. If the gains are not income from operations or income derived from sources in Hong Kong, they will not be taxed in Hong Kong. If the assets of a mainland company the shares of which are being transferred comprise mainly immovable property on the mainland, or the shares to be transferred are equal to not less than 25% of the shareholding of the mainland company, both the mainland and Hong Kong have the right to impose tax, but double taxation can be avoided through the arrangement of credit.

Methods for Elimination of Double Taxation

(a)  Tax paid in Hong Kong in respect of income derived from sources in Hong Kong by a mainland resident shall be allowed as a credit against mainland tax imposed on that resident. However, the amount of the credit shall not exceed the amount of mainland tax in respect of that item of income computed in accordance with the tax laws and regulations of the mainland.

(b)  Subject to the provisions of the tax laws of Hong Kong relating to the allowance of a deduction and a credit for tax paid in any territory outside Hong Kong, tax paid in the mainland in respect of any item of income derived from sources in the mainland by a resident of Hong Kong shall be allowed as a credit against Hong Kong tax imposed on that resident. However, the amount of the credit shall not exceed the amount of Hong Kong tax in respect of that item of income computed in accordance with the tax laws and regulations of Hong Kong.

(c)  Where a resident company of one side pays dividends to a resident company of the other side and that resident company of the other side, directly or indirectly, controls not less than 10% of the shares of the company which pays the dividends, the credit that the resident company of the other side is entitled to shall include the tax paid by the company which pays the dividends in respect of the profits from which such dividends are derived (but not exceeding the appropriate portion of profits incidental to the derivation of such dividends).

Content provided by Picture: HKTDC Research
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