China Consulting Consortium International Business Advisers, International Accountants and Certified Auditors Online Company Incorporation
Latest News
Amendments to the China-Hong Kong double taxation arrangement 2015-05-01

On 1 April 2015, Hong Kong and Mainland China signed a new protocol to amend the double taxation arrangement between China and Hong Kong (China-HK DTA). This is the Fourth protocol for the China-HK DTA while the Second and the Third ones were signed in 2008 and 2010 respectively. The most important amendment of the new protocol that benefits the Hong Kong taxpayers is to provide the tax exemption in China for gains derived by Hong Kong tax residents and “Hong Kong resident investment funds” from disposal of shares listed in recognized stock exchanges in China, provided that certain conditions are met.  Apart from this aspect, the other amendments include (1) a further preferential withholding tax rate of 5% on aircraft / shipping rentals; (2) an additional anti-treaty abuse measure for Dividends, Interest, Royalties and Capital Gains and (3) an expanded scope of information exchange.

Tax exemption for capital gains on listed shares

Before the Fourth protocol is signed, the existing China-HK DTA provides an exemption from taxation in China on the gains derived by a Hong Kong tax resident from disposal of shares in a Chinese company, provided that:

(i)        the Chinese company disposed is not a “land-rich entity” (i.e. < 50% of the company’s asset value was comprised, directly or indirectly, of immovable property situated in China at any time within 3 years before the disposal); and

(ii)       the Hong Kong tax resident did not have participation, directly or indirectly, of 25% or more of the capital of the Chinese company disposed of at any time within the 12 months before the disposal.

On the other hand, certain Notices pertaining to the withholding tax treatment on capital gains had been issued by the Chinese government in response to the “Shanghai-Hong Kong Stock Connect programme” launched on 17 November 2014.

(i)        Caishui [2014] No.79

Qualified Foreign Institutional Investors (QFIIs) and RMB Qualified Foreign Institutional Investors (RQFIIs) are temporarily exempt from withholding tax in China from trading of equity investments assets effective 17 November 2014.

(ii)       Caishui [2014] No.81

Capital gains from trading of listed shares derived by through the “Shanghai-Hong Kong Stock Connect programme” effective from 17 November 2014 are temporarily exempted from withholding tax in China.

In parallel with the above existing exemption regime, the Fourth protocol provides an exemption from taxation in China for the gains derived by Hong Kong tax residents and “Hong Kong resident investment funds” from disposal of shares listed in recognized stock exchanges in China, provided that the subject shares were purchased and sold on the same stock exchange.

Definitely, the existing exemption regime (before the Fourth protocol) has already covered most of the cases and the Fourth protocol has extended the capital gains exemption to certain cases in particular non-QFIIs or RQFIIs Hong Kong tax residents who invest in the Chinese entities shares listed on the Shenzhen Stock Exchange, regardless of whether those Chinese entities are land-rich ones or not and the restriction on shareholding or holding period.

Preferential withholding tax rate of 5% on aircraft / shipping rentals

The Fourth protocol reduces the withholding tax (WHT) rate for lease rentals derived by aircraft leasing and ship chartering business from the current treaty rate of 7% to 5%.

When compared to all tax treaties signed by the China, the WHT rate of 5% for the aforesaid lease rentals that Hong Kong will enjoy is the most beneficial one. Such provision echoes the plan of positioning Hong Kong as the international maritime services hub for China that the Chief Executive, CY Leung, mentioned in the latest Policy Address.

Anti-treaty abuse measure for Dividends, Interest, Royalties and Capital Gains

The Fourth protocol introduces another anti-treaty abuse provision (i.e. the main purpose test) for Dividends, Interest, Royalties and Capital Gains. In short, the relevant treaty benefits may be denied if the main purpose for entering into the arrangement was to take advantage of these benefits.

China-HK DTA is not the only DTA incorporating such anti-treat abuse provision. With an increasing focus on preventing treaty abuse in the international tax community, China and Hong Kong have also incorporated similar anti-treaty abuse provision when they recently signed or renewed their respective treaties with the treaty partners.

Expanded scope of information exchange

The Fourth protocol also expands the coverage of the Exchange of Information (“EoI”) arrangement to non-income related taxes in China such as Value Added Tax, Business Tax, Consumption Tax, Land Appreciation Tax and Real Estate Tax.

Such wide scope of taxes covered in the EoI provisions is line with the international trend to expand cooperation between tax authorities that targets to enhance the tax transparency.