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China-Hong Kong

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Second protocol to income tax arrangement between Hong Kong and China – details

On 30 January 2008, Hong Kong and China signed a second protocol to the arrangement for avoidance of double taxation and prevention of fiscal evasion. The arrangement for avoidance of double taxation and prevention of fiscal evasion (the Arrangement) was signed on 21 August 2006 and entered into force on 8 December 2006.

China and Hong Kong had different views on the interpretation of some of the articles contained in the Arrangement, and both sides reached an agreement on the necessary amendments. The second protocol was initialled and both parties exchanged letters on 11 September 2007. Additionally, as the new Chinese Enterprise Income Tax Law came into effect on 1 January 2008, corresponding amendments to the relevant articles of the Arrangement had to be made in respect of types of taxes involved and the definition of a "resident".

In determining whether a Hong Kong enterprise providing services, including consulting services, in China is liable to the Chinese Corporate Income Tax, both sides have now agreed to substitute the term "six months" with "183 days", i.e. a Hong Kong enterprise would be considered to have a permanent establishment in China and be subject to tax if it provides services for an aggregate of 183 days in any 12-month period in China. The use of the term "month" resulted in different interpretations (e.g. the provision of services for only a few days within one calendar month in China might be counted as one month). The use of the term "day" in the current definition is much clearer and simple.

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