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1. DOUBLE TAXATION ARRANGEMENT ("DTA") BETWEEN HONG KONG AND OVERSEAS JURISDICTIONS
1.3 DTA WITH THE MAINLAND CHINA (PRC)
With effective from August 2006, new DTA signed between HKSAR and PRC came into force.
It replaces the limited scope arrangement for the avoidance of double taxation signed in 1998. The new arrangement will take effect next year (1 January 2007 and 1 April 2007 in the Mainland and Hong Kong.
Withholding Tax on the following items (i) dividend, (ii) royalty, and (iii) interest received from the FIEs or China entity.
TAX PLANNING IDEALS:
The tax exemption for capital gains mentioned above and the reduced withholding tax on dividends, royalties and interest would increase Hong Kong's competitiveness and provide added incentives for Hong Kong companies and foreign companies to use Hong Kong to do business or to invest in the Mainland. Tax planning ideas that can be introduced by:
- Making use of a Hong Kong company to be the intermediate holding company for holding investments such as FIEs in the Mainland;
- Making use of a Hong Kong company as a vehicle for financing investments in the Mainland;
- Making use of a Hong Kong company to license intellectual properties such as copyright, trademark to the Mainland entities.
CAPITAL GAINS
The new arrangement includes an article on capital gains. Under this article, a full tax exemption in the Mainland is available on a capital gain derived by a Hong Kong investor from the disposal of shares in a Mainland company, provided that the shares sold are less than 25% of the shareholding of the Mainland company and the assets of the Mainland company are not comprised mainly of immoveable property situated on the Mainland. However, the implementation of this exemption is subject to the interpretation of the tax authorities in the Mainland.
Given the fact that there is no tax on gains from the sale of capital assets in Hong Kong, this article would effectively give a unilateral benefit to Hong Kong taxpayers. Although the exemption only applies to the sale of a minority interest in a Mainland company, it should still provide a relief for certain Hong Kong investors.
INCOME FROM EMPLOYMENT
Under the new arrangement, there is a change in the basis period for counting the number of days of presence in the Mainland for Hong Kong employees frequently visiting the Mainland from a calendar year to any 12-month period.
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