STA Interpretation: Fifth 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〉第五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, December 31, 2019)

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

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The Fifth 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 "Fifth Protocol") was formally signed in Beijing on July 19, 2019. The Fifth Protocol amends 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 and its related protocols (hereinafter the "Arrangement"). Its main contents are as follows:

I. Incorporation of BEPS Outcomes

The Fifth Protocol incorporates certain outcomes of the Base Erosion and Profit Shifting (BEPS) Action Plans, reflecting the latest changes in international tax rules.

Preamble

The Fifth Protocol amends the original preamble of the Arrangement. The revised preamble states that the purpose of signing the Arrangement is to develop economic relations between the two sides and strengthen cooperation in tax affairs. The Arrangement serves to eliminate double taxation and prevent non-taxation or reduced taxation through tax evasion and avoidance.

Resident

The Fifth Protocol amends the tie-breaker rule for dual-resident entities, i.e., the rules for determining which side a person (other than an individual) who is simultaneously a resident of both sides should be treated as a resident of for purposes of applying the Arrangement.

Under the original provisions of the Arrangement, a person other than an individual who was simultaneously a resident of both sides would be deemed a resident of the side where its place of effective management was situated. The Fifth Protocol amends this provision so that where a person other than an individual is simultaneously a resident of both sides, the competent authorities of both sides shall endeavor to determine the person's resident status through mutual agreement. If the competent authorities cannot reach agreement, that person shall not be entitled to any tax benefits or relief provided under the Arrangement, except to the extent and in the manner agreed upon by the competent authorities.

Permanent Establishment

The Fifth Protocol makes the following amendments to the permanent establishment (PE) article of the Arrangement:

1. It amends the provisions regarding what constitutes an agency PE. When a person acts on behalf of an enterprise in one side and habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and such contracts are in the name of the enterprise, involve the transfer of ownership or granting of the right to use property owned by the enterprise, or involve the provision of services by the enterprise, the activities carried out by that person on behalf of the enterprise shall constitute a PE of the enterprise in that side.

2. It amends the exclusion for independent agents, providing that where a person acts exclusively or almost exclusively on behalf of one or more enterprises with which it is closely related, that person shall not be considered an independent agent of any of those enterprises.

3. It specifies the circumstances under which a person should be considered closely related to an enterprise.

Capital Gains

Under the original provisions of the Arrangement, gains from the alienation of shares of a company could be taxed in a side if, at any time during the three years preceding the alienation, at least 50% of the value of the company's assets was directly or indirectly comprised of immovable property situated in that side. The Fifth Protocol amends this provision as follows: gains derived by a resident of one side from the alienation of shares or comparable interests (such as interests in a partnership or trust) may be taxed in the other side if, at any time during the three years preceding the alienation, more than 50% of the value of these shares or comparable interests was derived directly or indirectly from immovable property situated in that other side.

Entitlement to Arrangement Benefits

The Fifth Protocol deletes the "principal purpose test" provisions in the Fourth Protocol regarding dividends, interest, royalties, and capital gains, and adds an "Entitlement to Arrangement Benefits" article to the Arrangement. This is a "principal purpose test" applicable to all arrangements and transactions: if one of the principal purposes of any arrangement or transaction is to obtain benefits under the Arrangement, such benefits shall not be granted, unless it is established that granting the benefits would be in accordance with the object and purpose of the relevant provisions of the Arrangement.

II. Inclusion of "Teachers and Researchers" Article

To promote educational and scientific research exchanges between Mainland China and Hong Kong and to advance the development of the Guangdong-Hong Kong-Macao Greater Bay Area, the Fifth Protocol includes a "Teachers and Researchers" article. The main contents are:

1. Any individual who is employed by a university, college, school, or other government-recognized educational institution or scientific research institution in one side and who is, or immediately before visiting the other side was, a resident of that first side, and who stays in the other side primarily for the purpose of teaching or conducting research at a university, college, school, or government-recognized educational institution or scientific research institution in that other side, shall be exempt from tax in that other side for a period of three years with respect to the portion of remuneration for such teaching or research that is paid by, or on behalf of, the individual's employer in that first side, provided that such remuneration is subject to tax in that first side. The scope of "university, college, school, or government-recognized educational institution or scientific research institution" is as defined in Article 1 of the STA Announcement on Further Improving the Implementation Provisions of the Teachers and Researchers Article in Tax Treaties (STA Announcement [2016] No. 91) and Article 2 of the STA Circular on Clarifying the Applicable Scope of the Teachers and Researchers Article in China's Tax Treaties (Guoshuihan [1999] No. 37).

2. The "three-year" period in this article shall be computed from the later of: the date the teacher or researcher first arrives in the other side for teaching or research purposes, or the date on which this Protocol begins to apply.

3. The tax exemption under this article shall not apply to income from research that is conducted not for public interest but primarily for the private benefit of a specific person or persons. Even if the teacher or researcher conducts research at a qualifying educational or scientific research institution, income from research that is not for public interest shall not be eligible for the tax exemption under this article.

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Mainland China and the Hong Kong Special Administrative Region have completed their respective internal legal procedures necessary for the Fifth Protocol to enter into force. The Fifth Protocol entered into force on December 6, 2019. In Mainland China, it applies to income derived in tax years beginning on or after January 1, 2020; in the Hong Kong Special Administrative Region, it applies to income derived in years of assessment beginning on or after April 1, 2020.