Amendments to the China-HK double tax arrangement bring benefits as well as obligations to taxpayers
On 1 April 2015, Hong Kong and Mainland China signed the Fourth Protocol to the comprehensive double tax arrangement between China and Hong Kong (China-HK CDTA) in Hong Kong. The most important amendment in the Fourth Protocol which will benefit the Hong Kong taxpayers is to provide tax exemption in China for gains derived by Hong Kong tax residents (including “Hong Kong resident investment funds” as defined in the protocol) from disposal of shares of Chinese companies listed in the recognised stock exchanges, provided certain conditions are met. Other amendments are (1) reducing the withholding tax rate for rentals from aircraft leasing and ship chartering to 5%; (2) introducing the main purpose test to the Dividends, Interest, Royalties and Capital Gains articles as an additional anti-treaty abuse measure and (3) expanding the scope of information exchange under the CDTA to cover information related to taxes other than income taxes in China.
The Fourth Protocol to the China-HK CDTA brings benefits as well as obligations to taxpayers. The exemption from Chinese withholding tax for capital gains and the reduced Chinese withholding tax rate for aircraft and shipping rentals should be welcome by taxpayers in Hong Kong. On the other hand, the strengthening of the anti-treaty abuse provisions and the expansion of the scope of information exchange under the China-HK CDTA mean taxpayers who wish to enjoy the benefits under the China-HK CDTA are obligated to make legitimate bona fide use of the CDTA and refrain from treaty shopping.
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