Avoidance of double taxation in China and Hong Kong
Hong Kong and China
have signed an agreement for the avoidance of double taxation
which replaces the previous one signed between the two jurisdictions. The new treaty
is more comprehensive and its scope is to promote foreign investments
to and from the Mainland.
Hong Kong is an important business and financial center and many investors from China set up an office or open a company here
. The features of this double tax treaty
allow for a preferential tax treatment
for those doing business both in China and in Hong Kong
The taxes covered by the Hong Kong-China double tax treaty
The agreement for the avoidance of double taxation and prevention of fiscal evasion between the two jurisdictions covers a set of taxes imposed by the tax authorities. In case of Hong Kong, the taxes are:
- the salaries tax;
- the property tax.
The taxes covered by the treaty for Mainland China are the individual income tax, the foreign investment enterprises tax and the foreign enterprises tax.
The agreement also applies to similar taxes imposed after the signature date of the document. The two tax jurisdictions must inform one another of any relevant tax changes.
Taxation according to the Hong Kong-China double tax treaty
According to the double tax treaty signed in 2006 by the two jurisdictions, and its additional protocols, investors to and from Hong Kong and China benefit from preferential withholding tax rates.
The following withholding tax rates apply for dividend, royalty and interest payments:
- dividends: 5% or 10%;
- royalties: 7%;
- interest: 0% or 7%.
The 0% withholding tax rate for dividends
applies to those dividend payments made by a Chinese company to a Hong Kong company
if the recipient company holds at least 25% of the capital of the Chinese one making the payment. In all other cases the 10% rate is applicable.
The double tax treaty
also includes provisions for the taxation of capital gains and the income from employment for those Hong Kong employees
who visit the Mainland frequently. The basis for individual taxation in this case is calculated according to the number of days spent in China during a 12 month period.