Notice of State Administration of Taxation on Interpretation and Implementation of Some Clauses in the Arrangement on Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income in Inland China and Hong Kong Special Administrative Region Transmitted by Beijing Local Taxation Bureau

Jing Di Shui Fa[2007]No.209

 
Local Taxation Bureau, Sub-office of Each District and County, Each Office and Direct Subordinate Unit of Municipal Taxation Bureau: 　　We hereby transmit the Notice of State Administration of Taxation on Interpretation and Implementation of Some Clauses in the Arrangement on Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income in Inland China and Hong Kong Special Administrative Region (Guo Shui Han〔2007〕No.403) to you. Please abide by and implement the notice.
  May 21, 2007  

Notice of State Administration of Taxation on Interpretation and Implementation of Some Clauses in the Arrangement on Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income in Inland China and Hong Kong Special Administrative Region
Guo Shui Han [2007]No.403
The Bureau of State Taxation and Local Taxation Bureau in Each Province, Autonomous Region, Municipality and City Specifically Designated in the State Plan:
　　The Arrangement on Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income in Inland China and Hong Kong Special Administrative Region (Hereinafter referred to as “the Arrangement”) was signed on August 21, 2006 and entered into force as of January 1, 2007 in inland China. For the purpose of furthering enhancing the implementation of the Arrangement, the interpretations of the relevant clauses in the Arrangement and other issues are hereby clarified as follows: 1. About the Relations between the Arrangement and Taxation Regulations
　　The Arrangement is created for the purposes of coordinating and dividing the taxation jurisdictions of Inland China and Hong Kong Special Administrative Region and is applicable to the taxpayers of both sides. For any difference between taxation regulations and the Arrangement, the latter shall prevail. However, when the treatment of taxation regulations is superior to that of the Arrangement, the former may prevail.
　　2. Execution Time of the Arrangement
　　The Arrangement shall be implemented from January 1, 2007 in inland China and is applicable to the taxpayer’s income obtained from January 1 2007. When tax liabilities of resident enterprises or individuals are determined according to the Arrangement on the basis of residence time, such tax liabilities shall be calculated from January 1, 2007,
　　3. About Article 4 Resident
　　(1) Definition and of Determination of Resident
　　The definition of resident is made in this article on the basis of respective laws of the two regions. The definition of local resident shall be made by the two parties separately.
　　(2) In Paragraph 2, Clause 1, Article 4, resident of Hong Kong Special Administrative Region shall mean:
　　① Individuals who generally live in Hong Kong Special Administrative Region, i.e. individuals who have permanent domiciles for their selves and their families in Hongkong；
　　② Individuals who have been stayed in Hong Kong Special Administrative Region for more than 180 days in a certain tax year or for more than 300 days in two successive tax years (including one related tax year), i.e. individuals who temporarily work or live in Hongkong;
　　3. Hongkong resident legal person shall mean incorporated company established in Hongkong (including company with incorporation status, the same as below); or incorporated company established outside Hongkong, while its actual management and control center is in Hongkong, i.e. the management of overall daily operation of company, implementation of management decision, or the decision-making of board of directors are made in Hongkong (for example, if a Hongkong sub-office of a foreign bank does not deal with the management and decision-making of overall operation of the bank, such sub-office is not a Hongkong resident who is entitled to the treatment of Arrangement ).
　　(3)Treatment of the Arrangement Enjoyed by Qualified Resident
　　If the resident individuals mentioned in ① who generally live in Hong Kong go to work in other counties or regions, such individuals shall become taxpayers there according to the resident standards stipulated in the laws of such country and region; however, if such individuals are still permanent residents of Hongkong for their permanent domicile in Hongkong or other reasons, they are still entitled to the treatment of the Arrangement.
　　If the individuals mentioned in ② who temporarily live in Hongkong have or occur any tax liability in inland China, relevant regulations (arrangement) in their permanent domicile shall apply, i.e. if such individual is only a temporary resident of Hongkong, but a permanent resident of other countries and regions, tax treaty between China and such country and region shall apply; if there is no such treaty, relevant regulations in domestic laws shall apply.
　　For Hongkong resident who asks for treatment of the Arrangement, especially the resident individuals of other countries (regions) or resident legal persons established outside Hongkong, the Arrangement shall be applied cautiously. If the residential identity is not clear, the competent tax office above the county level shall provide such resident with a Letter on Request of Resident Identity Proof Issued by the Competent Tax Authority of Hong Kong Special Administrative Region, then the taxpayer may apply to Hongkong Taxation Bureau for a Hongkong resident identity proof (sample form attached below) or report to State Administration of Taxation for approval.
　　4. About Article 5 Permanent Organization
　　(1) In Clause 1 of Article 5, “Permanent Organization” shall mean the fixed business place for all or a part of operation of enterprise, in which the fixed business place refers to not only the office, branch or other fixed places registered and established for business operation of one enterprise occurs at the place of the other enterprise, but also office or other similar office facilities for long-term service provided to the other enterprise. Such clause shall not hamper the implementation of the rest of this article.
　　(2) About paragraph 2 of Clause 3, permanent organization established for labour service provided to the other party by employees of other personnel employed by one enterprise
Since “month” is the only calculation unit provided in the regulation that “if one enterprise assigns employees to provide labour service to the other party for more than six months successively or accumulatively in any twelve months”, concrete days could be ignored in implementation. For the purpose of a convenient operation, the calculation of month shall be temporarily made as follows:
　　When a Hongkong enterprise provides any service (including consultant service) for a certain project of inland China, the calculation period shall be from the month when the employee of the enterprise for such service arrives in inland China for the first time to the month when such employee leaves there at the completion of service; in case there is no employee working in inland China for a successive 30 days in this period, one month could be deducted; if the calculation period exceeds six months, permanent organization in inland China is confirmed. For any service project exceeding 12 months, the calculation period shall be 12 months from any month of arrival or leaving during the whole period of the project.
　　(3) Tax Determination of “Processing with Supplied Materials”
　　Article 5 of the Arrangement stipulates that: where inland enterprise accepts processing trade business of Hongkong enterprise, Hongkong enterprise participates in the production, supervision, management of sales of processing products in inland China, it shall be deemed that the Hongkong enterprise had established a permanent organization in inland China and such permanent organization shall pay taxes for its profit. However, such regulation has not changed the practice of collecting enterprise income tax on processing charges obtained by the aforesaid inland enterprises which engage in processing with supplied materials.
　　5. About Article 5 Associated Enterprise
　　The implementation of this article involves the determination and tax administration of associated enterprise, if the payer and the beneficial owner mentioned in Clause 7 of Article 11 (Interest) and Clause 6 of Article 12 (Royalty Fee) have any special relationship and such relationship involves tax adjustment, domestic laws and relevant regulations shall apply.
　　6. About Article 11 Interest
　　Article 11(Interest) of the Arrangement stipulates that: any interest income obtained by Hongkong resident enterprise or resident individual from inland China shall pay a 7% interest income tax in inland China. In order to prevent the abuse of the Arrangement, for any temporary Hongkong resident who is also a permanent resident of the third party, or Hongkong resident individual who is no longer a permanent resident of Hongkong and becomes a resident of the third party, the treatment of the Arrangement shall not apply.
Hongkong resident individuals who obtained deposit interest from inland China may directly handle the procedure for enjoying the treatment of the Arrangement in savings institutions with the ID card, Home-Visiting Certificate or the certificate issued by Hongkong Taxation Bureau. The concrete taxation procedure shall still be made on the basis of the Notice of State Administration of Taxation on Deposit Interest Income Tax of Foreign Individuals and Resident Individuals of Hongkong, Macao and Taiwan (Guo Shui Fa 〔1999〕No.201).
　　For any interest income obtained from inland China by Hongkong resident individuals or legal persons in other forms, its tax withholder may apply to the tax authority at the place where such interest income occurs within related data (resident identify proof, contract for such interest income and other data) for preferential treatment of the Arrangement; the local tax authority shall handle the issues of tax collection based on the tax rate provided in the Arrangement.
　　7. About Article 13 Property Income
　　(1) Share income obtained by the company with real property as its main transferred property
As for the income obtained by transferring company shares as provided in Clause 4 of Article 13 of the Arrangement and Article 2 of the Protocol, if real property is the main property of the company, the word “main property” for the right of imposing tax from the owner of such real property shall mean more than 50% of the whole property as provided in the Protocol. Where the ledger assets used to reach 50% of the whole property during the period when such shareholder holds company shares, such assets shall be deemed and handled as real property.
　　(2) Income Obtained from Transferring Other Company’s Shares
　　As for the income obtained by transferring other company’s shares as provided in Clause 5 of Article 13 of the Arrangement, when such shares are equal to at least 25% of share rights of one resident company, the following principle shall be applied on the basis of taxation regulations of such party: if Hongkong resident used to possess more than 25% of the shares of inland company, when such shares are transferred totally or partially and obtain any income, the competent authority of inland China shall have the right of taxation.
　　(3) Notwithstanding the foregoing, the two parties may determine the concrete definition for time limit of “used to” through negotiation.
　　8. About Article 14 Employment Income
　　Employment Income shall mean the labour income of non-independent individual. In Paragraph 1, Clause 2 of Article 14, the terms “stayed for not more than 183 days successively or accumulatively in a relevant tax year” is changed to “stayed for not more than 183 days successively or accumulatively in any twelve months from the beginning or the end of a relevant tax year”. This article shall be temporarily implemented on the basis of the following interpretation:
　　(1) “Stayed for not more than 183 days successively or accumulatively in any twelve months from the beginning or the end of a relevant tax year” shall mean not more than 183 days successively or accumulatively in twelve months calculated backwards from the month of any day of entry or calculated forwards from the month of any day of leaving.
On the basis of the abovementioned principle, if the beginning and the end of the twelve month are in two 　　years respectively during which a Hongkong resident individual had stayed in inland China for more than 183 days successively or accumulatively, such individual shall pay the tax for the income obtained in inland china during all the working months of these two years.
　　For example, a Hongkong resident individual was employed to work in inland China in February, April, November and December of 2007 and March, April, May, October and December of 2008, which including more than 183 days during November 2007 and October 2008. In this case, tax shall be collected for the tax year from November 2007 to October 2008 during which 183 days had been reached, i.e. all the months during which such Hongkong resident individual had been stayed in inland China during 2007 and 2008, i.e. including not only the months during November 2007 and October 2008, but also February and April of 2007 and December of 2008.
　　(2) The concrete determination of tax liability and the calculation of taxable income shall be made in following steps:
　　①Every time an individual declares the tax payment deadline or the date of leaving, twelve months shall be calculated backwards and find out whether such individual had stayed in inland China for more than 183 days in the twelve months successively or accumulatively. If such individual had stayed for more than 183 days, taxes shall be collected for all the working months of the one or two years during which such Hongkong resident individual had been worked in inland China.
　　②The concrete calculation of the taxable income and the utilization of an applicable formula shall be made according to Notice of State Administration of Taxation on the Related Issues for Implementation of Tax Treaty and Individual Income Tax Law (Guo Shui Fa〔2004〕No.97).
　　9. About Labour Activity of Independent Individual
　　In Article 3 of the Arrangement, the definition of “enterprise” includes legal entity and individual and the definition of “management” includes the business activity of legal entity and individual. Therefore, there is no separate article for individual labour in the Arrangement. The tax liability of labour activity of independent individual shall be determined according to the regulations made by permanent organization. For example, if a Hongkong resident is engaged in business operation in inland China as an independent individual, which could be deemed as a permanent organization according to the regulations made by permanent organization, the income of such Hongkong resident obtained in inland China as an independent individual shall be treated in accordance with Individual Income Tax Law.
　　10. About Article 21 Elimination of Double Taxation
　　Indirect credit is added to Clause 3 of Article 21 of the Arrangement: if one resident company invests in the other party with the shares more than 10% in the company of the other party, the enterprise income tax on dividend obtained by such resident company in the other party shall be exempted.
　　11. About Article 23 Procedure of Consultation
　　Clause 1 of Article 23 stipulates that: if a taxpayer reckons that the measures taken by one party or both parties will directly or indirectly lead to the tax collection which does not accord with the Arrangement, such taxpayer may, without considering remedial measures of respective internal laws, directly submit the case to the competent authority of the place where such taxpayer is a resident (with three years). In case any dispute arises during the implementation of the Arrangement by the tax authorities at all levels and a negotiation with Hongkong tax authority is needed, such dispute shall be reported to the Bureau of State Taxation and be settled by the Bureau of State Taxation and Hongkong Taxation Bureau through negotiation.
　　12. About Article 24 Information Exchange
　　After the implementation of the Arrangement, the tax authority of the two parties may exchange information. Such information shall be of the annual information for taxpayers before the implementation of the Arrangement; however, such information shall be applicable to the tax after the implementation of the Arrangement.
　　13. About Article 25 Other Rules
　　The prevention of “laws and measures for tax avoidance” involved in this article shall be deemed to include the avoidance of the abuse of the Arrangement.
　　14. Others
　　For other regulations not clarified herein which accord with the agreements signed with other units, the explanatory document of the relevant agreement and the related enforcement procedure shall apply; For relevant regulations clarified herein which accord with the agreements signed with other units, if such regulations haven’t been clarified in the explanatory documents of pervious agreements, the interpretation of this notice also be applicable to the interpretation and implementation of the same article in other agreements; any the explanatory document for the original Arrangement which accords with this Arrangement shall remain effective.
　　Please comprehend and implement the articles of the Arrangement correctly and duly report any problem occurring during implementation to International Taxation Department of State Administration of Taxation.
　　Annex:
　　1. Application Form for Residential Identity Certificate (Individual) for Arrangement on Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income in Inland China and Hong Kong Special Administrative Region
　　2. Application Form for Residential Identity Certificate (Company, Partner, Trust and Other Groups ) for Arrangement on Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income in Inland China and Hong Kong Special Administrative Region
April 4, 2007