Hong Kong and the mainland on Wednesday signed the Fourth Protocol to the Arrangement for the Avoidance of Double Taxation and Prevention of Fiscal Evasion.
"We are very pleased to sign the fourth protocol with the mainland to facilitate clear implementation of the relevant arrangement," said Chan Ka-cheung, secretary for financial services and the treasury in Hong Kong.
Chan said the fourth protocol clarifies the conditions under which an investment fund would be qualified for Hong Kong resident status, thus giving certainty to investment funds' application of the tax avoidance arrangements.
"This will be conducive to the actively promoted asset management businesses in Hong Kong, and will in turn help strengthen Hong Kong's status as an international financial center, " he said.
Regarding the gains derived from the sale and purchase of shares in listed companies, both sides agreed to add a new provision to clearly set out the tax liabilities of residents of both sides on the other side.
According to the provision in the fourth protocol, the gains derived by a Hong Kong resident from the sales and purchase of shares in a mainland listed company shall be taxable only in Hong Kong.
This is also applicable to the gains derived by a Hong Kong resident from the sale and purchase, under the Shanghai-Hong Kong Stock Connect, of A shares listed on the Shanghai Stock Exchange. Meanwhile, the provision also states that the arrangement of such a tax liability will be applicable to those investment funds complying with the requirements set out in the provision.
The protocol also amends the tax liability of aircraft and ship leasing business receiving royalties. The mainland withholding tax on royalties paid to aircraft and ship leasing business, currently at 7 percent, will be capped at five percent.
Furthermore, the protocol also expands the coverage of tax types under the exchange of information arrangement of the avoidance of double taxation arrangement, so as to fulfill Hong Kong's international obligation to meet global standards for enhancing tax transparency.
The fourth protocol will come into force after the completion of ratification procedures and notification by both sides. In the case of Hong Kong, an order is required to be made by the chief executive in council under the Inland Revenue Ordinance. The order is subject to negative vetting by the Legislative Council.
