The Notice of Interpretation and Implementation of the Arrangement on Avoiding Double Taxation and Preventing Tax Evasion between Mainland and the Hong Kong Special Administrative Region (the “Notice”) was promulgated on April 4, 2007 by the State Administration of Taxation of the PRC.  The Notice emphasizes on levy rules of personal and corporate direct and indirect income and makes the Arrangement on Avoiding Double Taxation and Preventing Tax Evasion between Mainland and the Hong Kong Special Administrative Region (the “Arrangement”) more detailed and more operational.  The key points of the Notice include the following:

1. Clarified the relationship between the Arrangement and the mainland taxation laws

Where there is any conflict between the Arrangement and the mainland taxation laws, the Arrangement shall prevail.  However, if the treatment provided in the mainland taxation laws is more preferential to the taxpayers, the levy can be implemented in accordance with the mainland tax laws.

2. Treatment under the Arrangement enjoyed by the Hong Kong residents

The resident’s identity is determined by the two sides themselves.  Hong Kong residents include three types and each type enjoys different treatment according to the Arrangement:

(1) Permanent residents, whether or not they are taxpayers of other countries or regions, they will enjoy the preferential treatments provided in the Arrangement;

(2) Temporary residents in Hong Kong, the income gained in the Mainland should be levied according to the convention between the Mainland and the country or region in which the individual obtains identity as a permanent resident.

(3) Corporation residents of Hong Kong can enjoy the preferential treatment according to the Arrangement, when the corporation is registered in Hong Kong, or it’s not registered in Hong Kong, but its essential control center is set up in Hong Kong.

Identity of a Hong Kong resident is proved by the Hong Kong Identification Card issued by the Tax Bureau of Hong Kong, or whichever by the approval issued by the State Administration of Taxation.

3. Concept and criteria of the standing body

The Notice admits bureaus and other similar facilities which are used for providing a long-term service for a corporation in addition to offices and branches on defining the concept and the criteria of the standing body.  The Notice makes clear that dispatching employees to another enterprise to provide labor services may constitute the standing body if the services meet certain time requirement enacted in the Arrangement.  The time is calculated by months only and days shall not be considered.

Under the situation of processing with provided materials trade, once the enterprise from Hong Kong participates in producing, monitoring, managing and selling the products, it would be treated as establishing the standing body in Mainland.  The enterprise from Hong Kong should pay tax for the profit gained from the standing body.

4.  Enjoyed preferential interest income tax rate of 7% to the Hong Kong residents

The temporary residents of Hong Kong who have become permanent residents in other countries, and the people who have lost Hong Kong permanent residents identity do not enjoy the preferential interest income tax rate of 7%.

Individuals from Hong Kong can pay the deposit interest income tax personally in the savings bank with proof documents.  The Hong Kong residents or Hong Kong corporations shall pay other interest income taxes to the local tax authorities where the interest income is gained.

5. Levy right to the income from transfer of property

According to Article 7 of the Notice, if 50% of the book value of the assets of a company is real estate during the time the shareholder holds the equity interest, the levy right to the income from transfer of property should belong to the tax authorities where the real estate is located.

If the transferred property is mainly located in Mainland or the transferred equity is equal to at least 25% of the equity interests of the company, the Mainland tax authorities will have the right to levy the taxes.

6. Tax obligations and calculation rules of income from employment

According to Article 8 of the Notice, which is an interpretation to Article 14 of the Arrangement, if the Hong Kong resident stays in Mainland over 183 days consecutively or accumulatively during 12 months, and the 12 months begins at a fiscal year and ends in the next fiscal year, such Hong Kong resident shall be obligated to pay tax to the local tax authorities for all the income he/she gained in Mainland during the two years.

The Notice made a further clarification of “any 12 months before the ending or after the beginning of a fiscal year” provided in the Arrangement.  Any 12 months from the month when the Hong Kong resident enters into Mainland or any 12 months before the month when the Hong Kong resident leaves Mainland shall be within the meaning of “any 12 months before the ending or after the beginning of a fiscal year”.

7. As to independent individual service activities, the tax obligation may be decided in accordance with the provisions of the standing body.