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HK, China Modify DTA To Clarify Tax On Investments

by Mary Swire, Lowtax.net, Hong Kong
02 April, 2015

China and Hong Kong have signed a fourth Protocol to their existing double taxation agreement (DTA), with amendments to support the administration of tax arrangements for cross-border equity investments and investment funds.

The Secretary for Financial Services and the Treasury, K C Chan, who signed the fourth Protocol on behalf of Hong Kong, said the deal "clarifies the conditions under which an investment fund would be qualified for Hong Kong resident status, thus giving certainty to investment funds' application of their tax arrangements."

He added that this "will be conducive to the actively promoted asset management businesses in Hong Kong, and will in turn help strengthen Hong Kong's status as an international financial center."

Both sides have agreed to add a new provision to confirm the tax treatment of individuals undertaking temporary activities in the other territory. Under the Protocol, gains derived by a Hong Kong resident from the sale and purchase of shares in a Mainland-listed company will be taxable only in Hong Kong. This provision is applicable, for example, to gains derived by a Hong Kong resident from the sale and purchase of A shares listed on the Shanghai Stock Exchange under the Shanghai-Hong Kong Stock Connect. This arrangement will also be applicable to those investment funds qualifying for Hong Kong resident status.

In addition, the Protocol caps at five percent (currently seven percent) the Mainland withholding tax on royalties paid to Hong Kong's aircraft and ship leasing businesses. Chan noted that "this will be conducive to the promotion of aerospace financing business in Hong Kong, and we will continue to explore other measures."

Last, the Protocol expands the tax types covered by exchange of tax information arrangements.

The fourth Protocol will come into force after the completion of domestic ratification procedures by both sides. The original DTA between Hong Kong and China entered into force on December 8, 2006. Second and third Protocols were signed on January 30, 2008, and on May 27, 2010, respectively.

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