STA Interpretation: Fourth Protocol to the Mainland-Hong Kong DTA

关于《国家税务总局关于〈内地和香港特别行政区关于对所得避免双重征税和防止偷漏税的安排〉第四议定书生效执行的公告》的解读

Source (Chinese): STA Policy Database — 政策解读 (STA General Office, March 16, 2016)

English translation: Independent translation. Not an official government translation.

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The Fourth Protocol to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter the "Arrangement") was signed in Hong Kong on April 1, 2015. The Fourth Protocol amends the Arrangement as follows:

I. Amendment to Article 8 (Maritime, Air, and Land Transport)

Article 1 of the Fourth Protocol amends paragraph 1 of Article 8 (Maritime, Air, and Land Transport) of the Arrangement. It provides that income and profits derived by an enterprise of one side from operating maritime, air, and land transport by ships, aircraft, or land vehicles in the other side shall be exempt from tax in that other side (including, in Mainland China, value-added tax (VAT) and other similar taxes). This amendment reflects the intent of Article 8 of the Arrangement and addresses the Mainland's tax reform replacing business tax with VAT, by changing the reference from "business tax" to "VAT" in paragraph 1 of Article 8, thereby maintaining continuity in the implementation of the Arrangement.

II. Amendment to Article 12 (Royalties)

Article 2 of the Fourth Protocol amends paragraph 2 of Article 12 (Royalties) of the Arrangement. It provides that royalties paid for the leasing of aircraft and ships shall be subject to tax at a rate not exceeding 5% of the gross amount of the royalties. The tax rate for royalties in other circumstances remains unchanged.

III. Amendment to Article 13 (Capital Gains)

Article 3 of the Fourth Protocol amends Article 13 (Capital Gains) of the Arrangement, allocating taxing rights over gains derived by a resident of one side from the alienation of shares of a company that is a resident of the other side and that are listed on a recognized stock exchange. The main contents include the following two aspects:

1. Notwithstanding the provisions of paragraphs 4 and 5 of Article 13 (Capital Gains) of the Arrangement, gains derived by a resident of one side from the alienation of shares of a company that is a resident of the other side and that are listed on a recognized stock exchange shall be taxable only in the side of which the alienator is a resident. Such alienation shall be limited to cases where the shares are bought and sold on the same stock exchange. "Bought and sold on the same stock exchange" means a transaction in which the counterparty, quantity, and price of the share purchase and sale are not pre-arranged between the buyer and seller but are determined in accordance with the customary trading rules of the public securities market.

2. An investment fund that meets certain conditions shall be treated as a resident investment fund of one side for the purposes of this provision. An investment fund that simultaneously meets all three of the following criteria shall be treated as a resident investment fund of one side:

   • (a) the regulatory establishment criterion;
   • (b) the fund management criterion;
   • (c) the capital-raising criterion.

IV. Principal Purpose Test

Article 4 of the Fourth Protocol adds a principal purpose test to Article 10 (Dividends), Article 11 (Interest), Article 12 (Royalties), and Article 13 (Capital Gains) of the Arrangement, in order to prevent abuse of the Arrangement.

V. Amendment to Article 24 (Exchange of Information)

Article 5 of the Fourth Protocol amends Article 24 (Exchange of Information) of the Arrangement, expanding the scope of Mainland taxes covered by the exchange of tax information from enterprise income tax and individual income tax to include VAT, consumption tax, business tax, land appreciation tax, and property tax. The aim is to strengthen the exchange of tax information and enhance tax transparency between Mainland China and Hong Kong.

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The Fourth Protocol has completed the legal procedures necessary for its entry into force and has been effective since December 29, 2015.