Hong Kong and China sign double taxation pact

September 01, 2006 | BY

clpstaff

On August 21 2006, Hong Kong and China signed The Arrangement for the Avoidance of Double Taxation on Income & Prevention of Fiscal Evasion (Arrangement),…

On August 21 2006, Hong Kong and China signed The Arrangement for the Avoidance of Double Taxation on Income & Prevention of Fiscal Evasion (Arrangement), which will eliminate double taxation and cut the top tax rates on direct income, such as operating profits and salaries, as well as indirect income, like dividends and interest.

Under the Agreement, investors who sell stakes of 25% or less in a PRC company are exempt from paying a 10% tax on the proceeds to the mainland because the tax right of the income, previously held by both jurisdictions, has been granted exclusively to Hong Kong. Double taxation occurs when a person or company that earns money in two jurisdictions ends up paying both governments for the same income or profits.

For individual Hong Kong residents, the top tax rate on dividend from investments in a PRC enterprise has been reduced from 20% to 10%. For Hong Kong businesses, the top withholding tax rate on interest and royalties received from PRC enterprises has dropped from 10% to 7%, and for residents from 20% to 7%.

Following ratification by both sides, the Arrangement will come into effect on or after April 1 2007 in Hong Kong and on or after January 1 2007 with respect to mainland taxes.

Hong Kong's Chief Executive Donald Tsang says the Arrangement, together with the Closer Economic Partnership Agreement (CEPA) between Hong Kong and China, will help promote Hong Kong's economy and enhance cross-border financing by providing added incentives for international investors to enter the mainland market through Hong Kong.

Alice Lau, Hong Kong's commissioner of inland revenue, says it is hard to estimate how much extra tax revenue the deal would bring to the Hong Kong government, or estimate how many people and businesses would benefit from the agreement. However, figures show that 228,000 Hong Kong residents were working in the mainland in 2005. Lau anticipates that “more and more will work there” as a result of recently introduced CEPA supplement.

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