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The HKSAR concludes DTAs with various other countries/tax jurisdictions. A DTA
provides certainty to investors on the taxing rights of the contracting parties, helps
investors to better assess their overall tax liabilities on their economic activities and
provides a potential incentive for overseas companies to do business in Hong Kong,
and likewise, for Hong Kong companies to do business overseas.
Therefore, Hong Kong has tried to establish a comprehensive DTA network that
minimizes potential double taxation exposure of Hong Kong residents and residents
of the DTA partner. The framework of DTAs are based on the Model Double Taxation
Treaties of the Organization for Economic Co-operation and Development ('OECD')
and the United Nations ('UN').
The Mainland of China and HKSAR signed two arrangements for the Avoidance of
Double Taxation on Income on 1998 and 2006. The purpose of the two DTA is to
eliminate any situation of double taxation that a Mainland or Hong Kong investor
may face when they carry out cross-border business activities.
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b. Enterprise
i. The term “enterprise” applies to the carrying on of business activities of
any form.
ii. An “enterprise of One Side” means “an enterprise carried on by a resident
of One Side”.
iii. An “enterprise of the Other Sides” means “an enterprise carried on by a
resident of the Other Side”.
iv. An “enterprise carried on by a resident” includes an enterprise carried on
by a resident company, a resident individual, a resident partnership or a
resident body of person.
c. Business
The term “business” includes the performance of professional services and
other activities of an independent character.
Article 4 – Residents
a. Resident individual
i. Definition of “resident individual”
In Hong Kong, a resident individual means:
(a) an individual who ordinarily resides in Hong Kong;
(b) an individual who stays in Hong Kong for
(i) more than 180 days during the relevant year of assessment, or
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(ii) more than 300 days in two consecutive years of assessment (one
of which is the relevant year of assessment).
If an individual has a permanent home in both Sides (i.e., Hong Kong and the
Mainland) concurrently, it is necessary to ascertain with which of the two Sides
his personal and economic relations are closer. Consideration will be taken into
account of his family and social relations; his occupations; political, cultural and
other activities; his place of business; and the place from which he administers
his property, etc.
b. Resident company
i. Definition of “resident company”
In Hong Kong, a resident company is:
(a) a company incorporated in Hong Kong, or
(b) if incorporated outside Hong Kong, a company normally managed or
controlled in Hong Kong.
b. Representative office
A genuine “representative office” is not regarded as a permanent establishment
subject to tax. In order to maintain a genuine representative office, the
following have to be observed:
i. the activities should be for the enterprise itself;
ii. the activities should not directly generate profits; and
iii. the function of the place of business should only be of a supportive nature.
c. Business agent
i. Dependent agent
A dependent agent is an agent acting under the control and leadership of
an enterprise of One Side.
Article 10 – Dividends
i. Double charge on dividend income
Dividends paid by a company which is a resident of One Side to a resident of the
Other Side, may be taxed in the Other Side. Thus, the same dividend income
may be taxed in both Sides.
As Hong Kong does not tax dividend income, the relevant DTA provisions do not
affect the Hong Kong profits tax liability on the receipt of dividend income.
Article 11 – Interest
a. Source of interest
i. The DTA is of the view that the source of interest is “the Side in which the
interest arises”.
ii. Interest is deemed to arise in a Side when the payer is the Government of
that Side, a local authority thereof or a resident of that Side.
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iii. Interest is deemed to arise in the Side in which the permanent
establishment, in connection with which the indebtedness on which the
interest is paid is incurred, is situated. In short, the source of interest is at
the Side in which the payer who effectively bears the interest is situated.
ii. Hong Kong taxes income on a territorial basis, and the limitation of tax
rates does not have any practical application in Hong Kong deposit interest
income. However, the 7% limitation is relevant to the income received by a
Hong Kong enterprise from a Mainland entity.
Article 12 – Royalties
a. Charge of tax on royalty income
Royalties arising in One Side and paid to a resident of the Other Side may be
taxed in that Other Side. However, such royalties may also be taxed in the Side in
which they arise and according to the laws of that Side.
ii. Royalty income chargeable at 30% under sections 15(1)(a),(b) and (ba)
When a Mainland enterprise receives royalties from a Hong Kong company,
and it is chargeable with assessable profits at the rate of 30% on the
royalties received, the effective tax rate in Hong Kong would be as follows:
(a) 4.5 in the case of an individual (30% x 15% = 4.5%).
(b) 4.95% in the case of a corporation (30% x 16.5% = 4.95%)
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As 4.5% and 4.95% are lower than 7%, the Mainland enterprise is taxed on
4.95%, not 7%.
iii. Royalty income chargeable at 100% under sections 15(1)(a), (b) and (ba)
When a Mainland enterprise receives royalties from a Hong Kong company,
and it is chargeable with assessable profits at the rate of 100% under
Section 21A(1)(a) on the royalties received, the effective tax rate in Hong
Kong would remain to be 15% for an individual or 16.5% for a corporation.
The reason is that it is stated in Article 25 of the DTA that the articles in the
DTA do not apply to tax avoidance provisions in the domestic tax law.
Under the Fourth Protocol, the withholding tax on royalties paid to aircraft and ship
leasing business will be capped at 5%.
Example 1
Company A, a resident of the Mainland, derives from Hong Kong royalties (hire
income of machinery) of $900,000 in the year ended 31.3.2018.
After deducting allowable expenses and depreciation allowance in respect of the
equipment:
Assessable profits is $500,000
Profits tax payable is $500,000 x 16.5% = $82,500
The effective tax rate of assessable profits of $82,500 on $900,000 = 9.17%
Applying the DTA, the tax rate charged on Mainland company on the royalty by Hong
Kong profits tax is restricted to 7% of the gross income, i.e. $900,000 x 7% = $63,000
(not $82,500)
The Hong Kong payer is required to deduct $63,000 only from the remittance made
to Company A.
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Example 2
Company B, a resident of the Mainland, derives from Hong Kong royalties (hire
income of machinery) of $900,000 in the year ended 31.3.2018.
After deducting allowable expenses and depreciation allowance in respect of the
equipment:
Assessable profits is $350,000
Profits tax payable is $350,000 x 16.5% = $57,750
The effective tax rate of assessable profits of $57,750 on $900,000 = 6.42%
As the effective tax rate on gross income is 6.42% which is lower than 7% the tax
payable remains $57,750, and unaffected by the 2007 DTA.
Article 17 – Pensions
Pensions and other similar remuneration (whether a payment in lump sum or by
instalments) paid to a resident of One Side in consideration of past employment are
taxable only in that Side (unless the pension is a public or a government or a
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government approved or recognised pension). In other words, the pension is taxable
according to the resident status of the recipient.
Example 3
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This Article requires the contracting parties, upon receiving a request for
information, to exchange tax information foreseeably required for applying the
China-HK DTA or the domestic law, even where the requested party does not need
such information for its own tax purposes. The previous version of the EoI clause only
allowed tax information to be exchanged where it related to the administration of
taxes under the domestic law of the jurisdiction in which it was requested.
Both parties are obliged to keep the information received confidential and can only
disclose the information to persons involved in the assessment and determination of
tax, including courts and state departments of administration.