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TAX & FINANCE: Mainland and the HKSAR signed the Fifth Protocol to the Mainland HK Double Taxation Arrangement
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Mainland and the HKSAR signed the Fifth Protocol to the Mainland
HK Double Taxation Arrangement

By Kelvin Lee, PwC

BT 201909 FINANCE 02On 19th of July, 2019, the Commissioner of the State Taxation Administration (“STA”), Mr. Wang Jun, and the Financial Secretary of the Hong Kong Special Administrative Region (“Hong Kong”, or “HKSAR”), Mr. Paul Chan, signed the Fifth Protocol to the 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 (“Mainland/HK DTA”) (“the Fifth Protocol”) in Beijing. The Fifth Protocol will enter into force upon the written notifications by both sides of the completion of their respective required ratification processes.


BT 201909 FINANCE 01The Fifth Protocol mainly introduces changes in the following two areas:


• Incorporating the recommendations in the Base Erosion and Profit Shifting (“BEPS”) action reports released by the Organisation for Economic Co-operation and Development (“OECD”), including amending the preamble and articles, such as Resident, Permanent establishment, Capital gains, etc., and adding a new ‘principal purposes test’ (“PPT”) article on prevention of treaty abuse;


• Adding a new “Teachers and researchers” article to grant tax exemption to teachers or researchers of one side for eligible remuneration received for services performed on the other side.


In this article, we have summarized the main contents of the Fifth Protocol, analysed the impact from both Mainland and Hong Kong tax perspective, as well as shared with you our observations.


The main contents of the Fifth Protocol and its impact from the Mainland and Hong Kong tax perspective


BT 201909 FINANCE 04Article 4 Resident

The existing Mainland/HK DTA provides a tie-breaker rule for determining the residency status of a person other than an individual who is a tax resident of both sides, which looks at the person’s place of effective management. The Fifth Protocol amends the above tie-breaker rule and replaces it with the provision that the STA and Hong Kong Inland Revenue Department (“Hong Kong IRD”) shall endeavour to determine the tax residency of such person by mutual agreement by taking into accounts its place of effective management, the place where it is incorporated, or otherwise constituted (and any other relevant factors). In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by the Mainland/HK DTA.

第四条 居民



BT 201909 FINANCE 08Article 5 Permanent Establishment

The Fifth Protocol adopts the recommendations in the final report of BEPS Action 7 (preventing the artificial avoidance of permanent establishment status), which introduces a stricter definition for Permanent Establishment (“PE”) constituted through an agent (“Agency PE”):

• Widening the scope of Agency PE: Under the existing Mainland/HK DTA, where a person is acting in the Mainland on behalf of a Hong Kong enterprise, and habitually exercising an authority to conclude contracts in the name of the Hong Kong enterprise, the Hong Kong enterprise shall be deemed to have a PE in the Mainland. The Fifth Protocol expands the scope of Agency PE to include not only “conclusion” of contracts, but also habitually “plays the principal role leading to the conclusion of contracts” (that are routinely concluded without material modification by the Hong Kong enterprise), and the Hong Kong enterprise shall be deemed to have a PE in the Mainland if these contracts are:

1. In the name of the Hong Kong enterprise; or

2. Not in the name of the Hong Kong enterprise, but for the transfer of the ownership of, or for the granting of the right to use, property owned by that Hong Kong enterprise or that Hong Kong enterprise has the right to use; or

3. Not in the name of the Hong Kong enterprise, but for the provision of services by that Hong Kong enterprise.

Under the existing Mainland/HK DTA, Agency PE only covers the above-mentioned type 1) situation. When the Fifth Protocol comes into effect, even if the contract is not concluded in the name of the Hong Kong enterprise, the Hong Kong enterprise may still be deemed to have a PE in the Mainland through the commissionaire arrangement as described in above-mentioned type 2) and 3) situations. Although the OECD has quite lengthy discussion on commissionaire arrangement, neither the STA nor HKIRD has officially released their interpretations on such arrangement. In that respect, there are uncertainties on how both tax authorities would deal with above-mentioned type 2) and 3) Agency PE.

• Stricter definition for “independent agent”: A Hong Kong enterprise would not create an “Agency PE” in the Mainland if it engages an independent agent to carry out the above mentioned activities in the Mainland. The Fifth Protocol provides a much stricter definition for independent agent, which states that if a person “acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related”, that person shall not be considered to be an independent agent. It further states that “closely related” refers to direct or indirect control of more than 50%.

Indeed, in Guoshuifa [2010] No.75, the STA has already adopted a relatively strict interpretation of an Agency PE. The wording in the Fifth Protocol largely follows the recommendations in BEPS Action 7 report.

From the perspective of the Hong Kong PE risks of Mainland tax residents: the widened scope of Agency PE is also applicable to a person acting in Hong Kong on behalf of a Mainland enterprise. If a person negotiates contracts in Hong Kong on behalf of a Mainland enterprise, even if such person does not “conclude” the contracts, there is still risk for the Mainland enterprise being deemed as having a PE in Hong Kong. It is the first time for the HKSAR to adopt such recommendations in the BEPS Action 7 report in a Hong Kong DTA.

BT 201909 FINANCE 07第五条 常设机构


• 扩大了代理型常设机构的定义:按照现行的内地与香港税收安排的规定,一个人在内地代表香港企业进行活动,如果该人有权以香港企业的名义签订合同并经常行使这种权力,则该香港企业会被视为在内地构成常设机构。






• 独立代理人的定义更为严格:香港企业聘请的独立代理人在内地从事的活动不会构成香港企业在内地的常设机构。第五议定书收紧了独立代理人的定义,规定“专门或者几乎专门代表一个或多个与其紧密关联的企业进行活动”的人不属于独立代理人。同时还定义了“紧密关联的企业”是指直接或间接控制权超过50%。



BT 201909 FINANCE 06Article 13 Capital Gains

The Fifth Protocol applies a more precise wording for gains from the alienation of shares. According to the existing Mainland/HK DTA, gains derived by a Hong Kong tax resident from the alienation of shares in a company may be taxed in the Mainland, if at any time within the 3 years before the alienation, these shares derived not less than 50% of the value, directly or indirectly, from immovable property situated in the Mainland. The Fifth Protocol clarifies that this article applies not only to shares in a company, but also to comparable interests, such as interests in a partnership or trust. In other words, the Mainland is granted the right to tax the relevant gains from alienation of such comparable interests derived by a Hong Kong resident.

In addition, the Fifth Protocol slightly changes the percentage of value derived from immovable property from “not less than 50%” to “more than 50%”.

According to the international practice, “the (shares of a) company, (interests in a) partnership or trust” refers to a company, a partnership, a trust established anywhere in the world.

Although the Mainland/HK DTA grants the relevant taxing rights to the Mainland, it is also necessary to consider the relevant provisions under the Mainland's Corporate Income Tax (“CIT”) law and the Individual Income Tax (“IIT”) Law to determine whether the relevant gains should be subject to tax under the “domestic law” in the Mainland.

From the Hong Kong tax perspective of a Mainland tax resident: Similarly, even the Fifth Protocol grants the taxing right to Hong Kong on such relevant gains (for example, gains derived by a Mainland investor from transfer of interests in a trust mainly invested in Hong Kong real estate), the relevant provisions of Hong Kong Inland Revenue Ordinance (“IRO”) would still need to be considered in determining whether such gains are subject to tax in Hong Kong.

In addition, the Fifth Protocol also clarifies that the term “immovable property” in this clause should be by reference to the definition of “Immovable Property” in Article 6 of the Mainland/HK DTA, which is consistent with international practice.

第十三条 财产收益





BT 201909 FINANCE 10Article 18 (A) Teachers & Researchers

The existing Mainland/Hong Kong DTA does not have an article dealing with teachers or researchers. The Fifth Protocol introduces Article 18(A), which provides individual income tax exemption for a period of 3 years for remuneration received by a Hong Kong resident individual employed by a university, institute, school in Hong Kong, or any other educational or research institution officially recognized in Hong Kong (“eligible institution”) from his Hong Kong employer and who stays in the Mainland mainly for the purpose of teaching or engaging in research in an eligible institution in the Mainland, provided that such remuneration is taxable in Hong Kong. After the expiration of the exemption period, such remuneration would be taxable in the Mainland according to the STA’s interpretation.

In response to this new article, the HKIRD has also amended the Hong Kong IRO recently to introduce Section 8(1AB). The effect of the section is that for a Hong Kong resident individual who derives income from services rendered by him/her as a teacher or researcher in the Mainland, if he/she has enjoyed tax exemption on the above mentioned income under the Mainland/HK DTA, then even if his/her “visits” to Hong Kong are not more than 60 days in the year of assessment concerned, he/she will not be eligible for the “60-Day Rule” exemption1 under the Hong Kong IRO. The amendment is to prevent “double non-taxation”.

STA Public Notice [2016] No.91 has provided the scope of eligible institutions. Specifically, except for training institutions, schools offering pre-school education, elementary education, secondary education, higher education and special education are all eligible.

From the Hong Kong tax perspective of a Mainland tax resident: Similarly, if a Mainland teacher or researcher receives remuneration from his/her Mainland employer for teaching or engaging in research in an eligible institution in Hong Kong and pays IIT on the remuneration, such remuneration is exempt from salary tax in Hong Kong for a period of 3 years.

The introduction of Article 18(A) is good news to teachers and researchers engaging in teaching and research activities on both sides. It will promote academic exchange and scientific research collaboration between the Mainland and Hong Kong, especially it will increase the competitiveness of Mainland educational institutions in attracting education and research talents from Hong Kong.







BT 201909 FINANCE 09Article 24 (A) Entitlement to Benefits

To prevent the abusive use of tax treaty, the Fifth Protocol amends the language used in the preamble of the Mainland/HK DTA, which emphasizes that in addition to the elimination of double taxation, the purpose of the Mainland/HK DTA is also to prevent non-taxation or reduced taxation through tax evasion or avoidance.

The Fifth Protocol also adds a new Article 24(A), the principal purposes test (PPT) article, under which a benefit under the Mainland/HK DTA shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this DTA.




BT 201909 FINANCE 05The takeaway

On 7th of June, 2017, the STA attended the OECD signing ceremony on the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) and signed the MLI on behalf of both China and the HKSAR. Thereafter, China and the HKSAR have respectively released their provisional MLI positions. The aim of the MLI is to swiftly modify bilateral tax treaties to implement treaty-related BEPS recommendations. As the Mainland/HK DTA is not a tax agreement between two sovereign countries, it is not covered by the MLI.

The Mainland and Hong Kong have gone through bilateral negotiation of the Fifth Protocol, which amends the relevant articles in the Mainland/HK DTA to incorporate the relevant suggestions in the MLI that both sides have agreed to, resulting in more stringent requirements on anti-tax avoidance3. Enterprises and individuals conducting cross-border business in the Mainland and Hong Kong should comply with new changes in international tax practice to mitigate cross-border tax risks and enhance tax compliance.

The relevant tax benefits provided by the newly added "Teachers and Researchers" article should facilitate the flow of teachers and researchers between the Mainland and Hong Kong. It is particularly beneficial for cooperative education projects in the Guangdong-Hong Kong-Macao Greater Bay Area (“GBA”). It will support the educational institutions to jointly build superior faculties, laboratories and research centres in the GBA, promote scientific and technological development, improve educational cooperation and exchange of talents mechanism, and promote the development of the GBA. However, Hong Kong's educational institutions participating in cooperative education projects in the Mainland will still need to be mindful of their CIT exposures due to the potential PE risks in the Mainland.




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