China: New Double Taxation Arrangement Between Hong Kong And Mainland China

Last Updated: 10 September 2007

On 21 August 2006, the Mainland government and the Hong Kong SAR government signed an "Arrangement between the Mainland of 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" (the "New Arrangement"). The New Arrangement has strengthened Hong Kong's position as the best base for investments into China with agreement on no capital gain tax or no or reduced withholding tax on dividend, royalties and interest payments from Mainland China to Hong Kong.

The New Arrangement became effective on 8 December 2006 and will apply in the Mainland, to income derived in taxable years beginning on or after 1 January 2007, and in Hong Kong, in years of assessment beginning on or after 1 April 2007, in line with the respective taxable year of the Mainland and Hong Kong.

Main Differences between the New Arrangement and the 1998 Arrangement

The New Arrangement replaced the previous double taxation arrangement between the two jurisdictions in 1998 (the "1998 Arrangement").

It extended the 1998 Arrangement by broadening the coverage of income to include income from immovable property, transactions between associated enterprises, dividends, interest, royalties, capital gains, pensions and government services etc. The New Arrangement also has broader administrative provisions, e.g. exchange of information.

Key New Provisions and Changes

Some key changes of the New Arrangement are :-

1. New Provisions regarding Capital Gains

If a Hong Kong resident company disposes of less than 25% of shareholding in a Mainland company, and the assets of the Mainland company are not comprised of mainly immovable property situated in the Mainland, any gain derived from the disposal will be tax exempt. Without such preferential treatment, the gain would be subject to a 10% withholding tax.

It is noted that according to the PRC SAT Rules, as long as the Hong Kong seller has ever owned 25% or more interest in the Chinese company, any amount or percentage of gain will still be taxable in the Mainland.

Paragraph 2 of Protocol to the New Arrangement provides that the term "assets" shall mean the value of the assets, and the term "mainly" shall mean not less than 50%.

The PRC SAT Rules however have a broader interpretation : as long as there has ever been 50% or more of immovable property on the book value of the company, it will be deemed to be a company comprising of mainly immovable property in the Mainland; in which case, the preferential rate will not apply.

Nevertheless, the timeframe for "ever been" may be further discussed and agreed to between the Mainland and Hong Kong.

2. Withholding Tax

The New Arrangement also covers indirect income such as interest, dividends and royalties as follows :-





China normal rate

0% or 20%



Hong Kong normal rate




New Arrangement rate

5% or 10%


0% or 7%

In general, Hong Kong investors are provided with preferential treatments through reduced withholding tax rates or a tax exemption. For instance, interest and royalties income under the New Arrangement is subject to a 7% withholding tax as opposed to 10% for others not within the New Arrangement.

Article 9 of the New Arrangement defines "Associated Enterprises". Related profits derived from any associated enterprises would not be treated differently from those obtained between independent enterprises. Profits which, but for the association, would have been accrued, will be included in the enterprise for taxation purpose, hence, addressing the transfer pricing issue.

3. Income from Employment : the 183-days tax exemption rule

Under the New Arrangement, remuneration derived by a resident of one place (i.e. Hong Kong or Mainland) in respect of an employment exercised in the other place shall be taxable only in the first-mentioned place if all the following 3 conditions are met :-

  1. the recipient is present in the other place for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable period concerned;
  2. the remuneration is paid by, or on behalf of, an employer who is not a resident of the other place; and
  3. the remuneration is not borne by a permanent establishment of the employer in the other place.

It is noted that the "any 12-month period" basis has replaced the old "calendar year" basis provided in the 1998 Arrangement. With this change, it may be more difficult for tax resident of one place to claim tax exemption from the other place.

4. Exchange of Information and others

Article 24 of the New Arrangement allows the authorities of the both sides to exchange information necessary for carrying out the provision of the New Arrangement or of the domestic laws concerning double taxation. It is also stated that any such information exchanged shall be treated as confidential and only be disclosed to persons or relevant authorities or officials. This provision aims to protect the taxpayers' information from being misused.

It is noted that the PRC SAT Rules stipulate that the information requested may be those prior to the effective date of the New Arrangement but it should only be used for purpose of tax implementation after the effective date.

Further, Article 25 of the New Arrangement provides that nothing in the New Arrangement shall prejudice the right of the parties to apply its domestic laws and measures against tax avoidance.

The Hong Kong Inland Revenue Department Practice Notes and the PRC SAT Rules

The Hong Kong Inland Revenue Department ("IRD") issued its Interpretation and Practice Notes No 44 ("DIPN No 44") on 29 December 2006 (and the DIPN No 44 (revised) on 26 April 2007) in relation to the New Arrangement. The DIPN No 44 states that if any inconsistency between the New Arrangement and the Inland Revenue Ordinance ("IRO") arises, the IRD will resolve the issue without violating the New Arrangement. If the New Arrangement and the IRO provide different benefits to a taxpayer, the one that provides a greater benefit to the taxpayer will prevail.

Similarly, the rules issued by the State Administration of Taxation of PRC on 4 April 2007 [Guoshuihan [2007] No.403] ("PRC SAT Rules") also offer the preferential treatment to taxpayer in case there is difference in the New Arrangement and Chinese domestic tax law.

Our Services

If you have any question about the above Double Taxation arrangement or issues relating to structuring investments or mergers and acquisitions in Mainland China, experienced lawyers in our China Business Department will be happy to assist you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.