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China: Fourth protocol to the China – Hong Kong tax treaty



Khoonming Ho

Lewis Lu

On April 1 2015 the governments of the People's Republic of China (PRC) and the Hong Kong SAR signed the Fourth protocol (the Protocol) to the China – Hong Kong double tax arrangement (DTA) of 2008. The Protocol provides 'best-in-class' tax treaty provisions for Hong Kong enterprises undertaking aircraft and ship leasing from the mainland and those conducting cross-border public market securities investment activities. These treatments would boost Hong Kong's development as a capital equipment leasing hub and as an asset management centre. For royalty withholding tax, lease rentals derived from aircraft and ship leasing businesses (excluding the interest portion under a finance lease arrangement), covered under the DTA's royalties article, are now subject to a reduced rate of withholding tax (WHT) of 5%, down from 7%.

For capital gains, the Protocol also provides clarifications that capital gains derived from shares trading where both the purchase and sale of shares in listed companies on a recognised exchange platform by either Hong Kong or China enterprises, will be exempt from tax in the jurisdiction where listed shares are transacted. Clarifications are also provided to permit an investment fund, established in Hong Kong, to be considered as tax resident in Hong Kong and therefore to be eligible for this listed shares relief in its own right.

And for treaty abuse and exchange of information, as has been the trend for new and updated DTAs of China over the past three years, the Protocol inserts anti-avoidance rules in the dividend, interest, royalties and capital gains articles providing that DTA benefits will not be available if the main purpose for entering into an arrangement was to secure a more favorable tax position. The Protocol also extends the definition of PRC taxes subject to the exchange of information article under the DTA to include VAT, consumption tax, business tax, land appreciation tax and real estate tax.

The Protocol is highly advantageous to Hong Kong and the revised DTA offers significant comparable benefits to Hong Kong enterprises conducting cross-border investments and business activities with the mainland. In addition, it follows China's general DTA update policy and is aligned with China's recent focus on BEPS.

Khoonming Ho (

KPMG, China and Hong Kong SAR

Tel: +86 (10) 8508 7082

Lewis Lu (

KPMG, Central China

Tel: +86 (21) 2212 3421

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