Departmental Interpretation And Practice Notes - No

1 Inland Revenue Department Hong Kong Departmental Interpretation AND Practice Notes NO. 44(REVISED) 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 These Notes are issued for the information of taxpayers and their tax representatives. They contain the Department s Interpretation and practices in relation to the law as it stood at the date of publication.

2 Taxpayers are reminded that their right of objection against the assessment and their right of appeal to the Commissioner, the Board of Review or the Court are not affected by the application of these Notes . These Notes replace those issued in April 2007. LAU MAK Yee-ming, Alice Commissioner of Inland Revenue August 2008 Our web site : Departmental Interpretation AND Practice Notes No.

3 44(REVISED) CONTENT Paragraph Introduction 1 Arrangement for the avoidance of double taxation 3 Relationship between the comprehensive arrangement and the 5 Ordinance Effective dates and applicable text 8 Article 1 Persons covered 11 Article 2 Taxes covered 12 Article 3

4 General definitions 15 Article 4 Resident 19 (I) Resident individual 21 (II) Resident company 26 (III) Resident persons other than individuals and 31 companies Certification of resident status 32 Article 5 Permanent establishment The concept of a permanent establishment 36 A building site, a construction, assembly or 38 installation project Provision of services by an enterprise 42 The place where preparatory or auxiliary activities 44 are conducted Business agent 47 Article 6 Income from immovable property 48 Article 7 Business profits Allocation of taxing rights 55 Computation of business profits 56 Other methods of computing

5 Profits 62 Other principles 64 Article 8 Shipping, air and land transport 67 Shipping transport 68 Air transport 69 Land transport 70 Article 9 Associated enterprises 73 Adjusting the profits of an enterprise of One Side 74 Making an appropriate adjustment to the profits of an 75 enterprise of the Other Side

6 Income from investment Dividends, Interest and Royalties 79 Article 10 Dividends 84 Article 11 Interest 90 Article 12 Royalties 96 Article 13 Capital gains 101 Article 14 Income from employment 109 Present for not exceeding 183 days exemption 110 condition Hong Kong residents working across the Mainland 114 border ii 115 Article 15 Directors feesArticle

7 16 Artistes and sportspersons 116 Article 17 Pensions 117 Article 18 Government service 120 Article 19 Students 125 Article 20 Other income 126 Article 21 Methods for elimination of double taxation 128 Article 22 Non-discrimination 141 Article 23 Mutual agreement procedure 144 Article 24 Exchange of information 148 Article 25 Miscellaneous provisions 158 Article 26 Entry into force 159 Article 27 Termination 160 Conclusion 161 iii INTRODUCTION On 11 February 1998, representatives of the Mainland of China ( the Mainland ) and the Hong Kong Special Administrative Region ( Hong Kong ) signed a Memorandum that detailed an Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation on Income ( the Limited Arrangement ).

8 The Limited Arrangement covers mainly business profits of an enterprise operating through a permanent establishment, shipping, air or land transport income, as well as income from personal services. Some two years later, on 2 February 2000, the Mainland and Hong Kong signed the Air Services Arrangement between the Mainland of China and the Hong Kong Special Administrative Region ( the Air Services Arrangement ). 2. However, with China s subsequent accession to the World Trade Organisation and the increasingly close economic ties between the Mainland and Hong Kong, both the Mainland and Hong Kong considered it necessary to expand the Limited Arrangement into a comprehensive arrangement for the avoidance of double taxation, one on a par with international standards.

9 Accordingly, on 21 August 2006, the Mainland and Hong Kong signed an 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 Comprehensive Arrangement ), to eliminate any situation of double taxation that might otherwise be faced by a Mainland or Hong Kong investor in the conduct of cross-border economic activities.

10 In the lead up to the signing, differences in the Interpretation of some of the provisions of the Comprehensive Arrangement were identified by both Sides during the course of negotiations. However, neither the Mainland nor Hong Kong had any desire to engage in prolonged discussions that could hinder the early implementation of the Comprehensive Arrangement. Hence, the differences were put aside for further deliberation in the post implementation stage.