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. 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 .

2 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. 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 General definitions 15 Article 4 Resident 19 (I)

3 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 profits 62 Other principles 64

4 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 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 16 Artistes and sportspersons 116 Article 17 Pensions 117 Article 18 Government service

5 120 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 ).

6 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.

7 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. 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.

8 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. Both Sides then resumed discussions and consensus was reached on the Interpretation and implementation of the outstanding issues. The Mainland and Hong Kong exchanged letters ( the exchange letters ) and formally signed the Second Protocol to the 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 Second Protocol ) on 11 September 2007 and 30 January 2008 respectively.

9 ARRANGEMENT FOR THE AVOIDANCE OF DOUBLE TAXATION 3. For the purpose of giving effect to the Comprehensive Arrangement, an Order ( Specification of Arrangements (the Mainland of China) (Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income) Order ) was made by the Chief Executive in Council on 27 October 2006, under section 49 of the Inland Revenue Ordinance (Cap. 112) ( the Ordinance ). The Order was published in the Gazette as Legal Notice 234 of 2006. For the purpose of giving effect to the Second Protocol, an Order ( Specification of Arrangements (the Mainland of China) (Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income) (Second Protocol) Order ) was made by the Chief Executive in Council on 15 April 2008.

10 The Order was published in the Gazette as Legal Notice 89 of 2008. 4. The purpose of the Comprehensive Arrangement is to allocate the right to tax between the two Sides on a reasonable basis so as to avoid double taxation of the same item of income in both Sides. The provisions of the Comprehensive Arrangement have been made by reference to those contained in the Model Tax Conventions of the Organisation for Economic Co-operation and Development (the OECD ) and the United Nations. Appropriate modifications have been made to cope with the particular requirements of the Mainland and Hong Kong.