PRESS RELEASE

Order on arrangement for avoidance of double taxation with Mainland gazetted

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An order, made by the Chief Executive in Council under the Inland Revenue Ordinance to implement the Second Protocol to the Arrangement for the Avoidance of Double Taxation with the Mainland, was gazetted today (April 18).

Hong Kong has entered into avoidance of double taxation arrangements/agreements (DTA) with the Mainland and three other jurisdictions (Belgium, Thailand and Luxembourg).

"The Mainland and Hong Kong have different views on the interpretation of some of the Articles upon implementation of the DTA," a government spokesman said.

"After negotiation, both sides reached an agreement on the necessary amendments to the DTA and signed the Second Protocol," he said.

The Second Protocol clarifies the following points:

(1) 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 use of "183 days" instead of the previous "six months" as the basis provides more certainty, as the meaning of "month" was subject to different interpretations previously.

(2) The gains derived by a Hong Kong resident from the alienation of shares in a company may be taxed on the Mainland, if not less than 50% of the assets of this company consist of immovable properties on the Mainland at any time within three years before the alienation. Previously, there was no "within three years" as the reference period.

(3) The gains derived by a Hong Kong resident from the alienation of shares in a Mainland company may be taxed on the Mainland, if within 12 months prior to the alienation the recipient of the gains once owned not less than 25% of the entire shareholding of this company. Previously, there was no "within 12 months" as the reference period.

The order will be tabled at the Legislative Council on April 23 for negative vetting.

The Second Protocol was signed by the Secretary for Financial Services and the Treasury, Professor K C Chan and the Deputy Commissioner of the State Administration of Taxation, Mr Wang Li, in Beijing on January 30, 2008.

Ends/Friday, April 18, 2008
Issued at HKT 10:07

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