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China-Hong Kong

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Update - Fifth Protocol to Tax Arrangement between China and Hong Kong

The fifth amending pending protocol to the 2006 income tax arrangement between China and Hong Kong was signed on 19 July 2019. Changes made by the protocol include:

  • The replacement of the preamble in line with BEPS standards;
  • The amendment of Article 4 (Resident) to provide that if a person other than an individual is a resident of both jurisdictions, the competent authorities will determine its residence for the purposes of the arrangement through mutual agreement, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors, and if no agreement is reached, such person shall not be entitled to any relief or exemption from tax provided by the arrangement, except to the extent and in such manner as may be agreed upon by the competent authorities;
  • The amendment of Article 5 (Permanent Establishment) to include updated agent PE provisions in line with BEPS standards, as well as provisions to define closely related persons, which includes more than 50% direct or indirect ownership of beneficial interests, voting rights, or shares;
  • The amendment of Article 13 (Capital Gains) to provide that with respect to the taxation of gains derived by a resident of one jurisdiction from the alienation of shares deriving more than 50% of their value from immovable property situated in the other jurisdiction, the other jurisdiction may tax the gains on the shares if the 50% threshold was exceeded at any time during the three years preceding the alienation;
  • The amendment of Article 14 (Income from Employment) and the addition of Article 18A (Teachers and Researchers); and
  • The addition of Article 24A (Entitlement to Benefits Under the Arrangement), which provides that a benefit under the arrangement shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the arrangement.

The protocol will enter into force once the ratification instruments are exchanged and will apply in China from 1 January of the year following its entry into force and will apply in Hong Kong from 1 April of the year following its entry into force.

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