Following ratification by the respective governments of both sides, the Fourth Protocol to the double tax arrangement between Hong Kong and mainland China (HK-China DTA) is now in retroactive effect as of 29 December 2015.
Information exchange. The Fourth Protocol extends the scope of the exchange of information article under the HK-China DTA to cover information related to the following Chinese taxes: value-added tax; business tax; consumption tax; land value-added tax; and property tax. The expanded scope allows mainland Chinese tax authorities to request relevant information from their Hong Kong counterparts with respect to any of the above-mentioned taxes.
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Anti-abuse provision tightened. The Fourth Protocol introduces an additional anti-abuse provision to the HK-China DTA. Claims for benefits on passive income (i.e. dividends, interest, royalties and capital gains) may be denied if the “main purpose” of the claimant is to obtain such benefits. However, this main purpose test may not actually change the anti-abuse position for Hong Kong tax residents seeking to claim benefits under the HK-China DTA.
It is interesting to note that this main purpose test imposes a lower standard than the anti-treaty abuse initiative proposed by the Organization for Economic Co-operation and Development (OECD). Specifically, article 6 of the OECD’s Base Erosion and Profit Shifting Action Plan recommends a principal purposes test where treaty benefits will be denied if one of the principal purposes of the claimant is to obtain treaty benefits (rather than the main purpose).
Further exemption for capital gains. Article 13 of the HK-China DTA exempts China enterprise income tax on capital gains derived by a Hong Kong tax resident from disposal of shares in a Chinese company if: (1) less than 50% of the company’s assets were comprised, directly or indirectly, of real property situated in China at any time within three years before the date of disposal; and (2) the Hong Kong tax resident held no more than 25% of the total equity interest, directly or indirectly, in such company at any time within 12 months before the date of disposal.
An investment fund is deemed to be a “Hong Kong resident investment fund” if: (1) the fund is constituted under Hong Kong law; (2) the fund is recognized by the Securities and Futures Commission (SFC) and subject to its oversight; (3) the fund is managed by SFC-licensed managers; and (4) more than 85% of the fund’s capital was raised through the Hong Kong market.
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Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker & McKenzie by e-mailing Danian Zhang (Shanghai) at: danian.zhang@bakermckenzie.com
