The Mainland of China and the Hong Kong Special Administrative Region entered into a new arrangement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (“DTA”) on 21 August 2006, to eliminate any situation of double taxation might otherwise be faced by a Mainland or Hong Kong investor in the conduct of cross-border economic activities. In Mainland of China, the provision of this arrangement is applicable to income derived in taxable years beginning on or after 1 January 2007; and in Hong Kong, in years of assessment beginning on or after 1 April 2007.
Allocation of taxing rights of some profits according to the provisions of the DTA are discussed hereunder:

DIRECT INCOME

Business Profit

According to Article 7 of DTA, the profits of an enterprise of HK shall be taxable only in HK unless the enterprise carries on business in the Mainland through a permanent establishment situated therein, in which case its profits may be taxed in the Mainland, but only so much of them as is attributable to that permanent establishment.

Employment Income

Article 14 of the DTA provides that remuneration derived by a Hong Kong resident in respect of an employment shall be taxable only in HK unless the employment is exercised in the Mainland. If the employment is exercised in the Mainland, such remuneration as is derived therefrom maybe taxed in the Mainland. However, it will be exempt from tax in the Mainland if all the following three conditions are satisfied:

1.	The Hong Kong resident is present in the Mainland for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable period concerned;
2.	The remuneration is paid by, or on behalf of, an employer who is not a resident of the Mainland; and
3.	the remuneration is not borne by a permanent establishment which the employer has in the Mainland.

PASSIVE INCOME

Dividends

Article 10 provides that dividends paid by a company which is a resident of the Other Side, may be taxes in that Other Side, that is, the Side of residence has the right to tax the dividends. Such dividends may also be taxes in the Side of which the company paying the dividends is a resident (i.e. the Side of source) and according to the laws of that Side. The tax to be charged shall not exceed:

a.	where the beneficial owner is a company directly owning at least 25% of the capital of the company which pays the dividends, 5% of the gross amount of the dividends;
b.	in any other case, 10% of the gross amount of the dividends.

As dividends are not chargeable to tax in Hong Kong, the above tax rates will not be applicable in Hong Kong.

Interest

For interest received by a Hong Kong resident from the Mainland, the withholding tax will be reduced to 7% under Article 11 of the DTA.

Royalties

Income arising from use or right to use of any films, tapes and sound recording, patent copyrights, trademark etc. paid by a Chinese entity to a Hong Kong resident will be subject to a 7% withholding tax on the gross amount in Hong Kong. The withholding tax on royalties paid to aircraft and ship leasing business would be capped at 5% of the gross amount of the royalties.

Capital Gains

Full tax exemption is provided for any capital gains derived by a Hong Kong resident from disposal of shares of a Mainland company, provide that:

1.	The assets of the Mainland company do not comprise mainly of immoveable property situated in the Mainland, within 3 years prior to the alienation transaction; or
2.	At any time within the 12 months before the alienation, the shares sold, directly or indirectly, of not more than 25% of the Mainland company.

The matters discussed above are general information only. You should refer to the full text of the DTA for further information regarding its provisions. Consult with a tax professional if further clarification is required.

Source：Hong Kong Inland Revenue Department’s website

- https://www.ird.gov.hk/eng/pdf/dipn44.pdf
- https://www.ird.gov.hk/eng/tax/dta_inc.htm