Hong Kong and China signed a protocol to the double tax treaty between them in April 2015. That protocol has come into force with effect from 29 December 2015.
The protocol amends the existing treaty as follows:
- Profits from the operation of ships or aircraft in the other country will be exempt from taxes in the other side including value added tax and alike. (no doubt this will increase interest in the use of Hong Kong lessors)
- Withholding tax on royalties arising from the leasing of aircraft and ships is reduced to 5%.
- Gains derived by a resident of one side from the alienation of shares in listed companies resident in the other side are only taxable in the first side if the shares are purchased and sold in the same stock exchange. This also applies to an investment fund if the investment fund satisfies certain requirements. (Critically the company or fund may only be taxed where it is resident. The protocol goes on to detail where an investment fund is resident and basically looks to where it is regulated.)
- An anti-abuse clause is included in the tax agreement through the fourth protocol.
- The scope of the exchange of information provision has been extended to value added tax, business tax, consumption tax and land value appreciation tax and property tax.
Given the extent of investment into China from Hong Kong, any change to that regime is going to be closely followed. It is also very useful for investment funds investing into China in that provided that they are managed in Hong Kong they may only be taxed in Hong Kong.