Tax Newsletter – November/December 2014 (China & Hong Kong)
Thanks for visiting the most recent issue in our Tax E-newsletter.
Numerous developments occured within the PRC and Hong Kong that may be of legal and tax significance for your companies. Within the PRC, the People’s Bank of China (“PBOC”) released a circular permitting two-way mix border RMB cash poolings to become available to multinational companies countrywide. The Secretary of state for Finance (“MOF”) and also the Condition Administration of Taxation (“SAT”) also collectively released a circular verifying the continuance of preferential tax remedies for Advanced Technology Service Businesses (“ATSE”) for that period from 1 The month of january 2014 towards the finish of 2018. Further, the Sitting promulgated an open notice to explain certain implementation issues on faster depreciation of fixed assets along with a public announcement to codify individual earnings taxation remedies on capital gains of numerous equity transfers. According to the Shanghai-Hong Kong Stock Connect program (“Stock Connect”), the China Investments Regulating Commission (“CSRC”), MOF and Sitting collectively launched a notice concerning PRC tax remedies on investments via Stock Connect. So they can improve anti-avoidance tax laws and regulations, Zhejiang released a circular to bolster the supervision on various mix-border transactions. Various consumption tax guidelines were also modified through the finance and tax government bodies. Finally, the recently signed China-Europe double taxation agreement arrived to pressure on 15 November 2014 and is applicable to earnings produced from 1 The month of january 2015 let’s start.
In Hong Kong, an extensive double tax agreement was signed using the Uae. Further, notes were exchanged between your HKSAR Government and also the Japan Government regarding existing double tax agreement. The intergovernmental agreement using the U . s . States, which facilities compliance using the US Foreign Account Tax Compliance Act, has formally been joined into. To be able to promote the introduction of eft’s (“ETFs”), the HKSAR Government suggested to waive stamp duty for that change in ETFs shares or models. Additionally, the research Group on Asian Tax Administration and Research established an activity pressure to permit the Asia-Off-shore region to take part in discussions and turn into up-to-date on worldwide developments. Also, the annual meeting between your Hmrc Department (“IRD”) and also the Hong Kong Institute of Licensed Public An accounting firm (“HKCPA”) occured where lots of important issues were talked about. Finally, the IRD has reported some tax avoidance cases throughout the two several weeks.
Please visit full publication below to learn more.
05 TWO-WAY CrOSS BOrDEr rMB
CASH POOlING AllOWED FOr
MNCS NATIONWIDE IN CHINA
06 ADVANCED TECHNOlOGY
SErVICE ENTErPrISES CONTINUE
TO ENJOY PrEFErENTIAl INCOME
06 FUrTHEr ClArIFICATION ON
THE IMPlEMENTATION OF
ACCElErATED DEPrECIATION OF
07 CHINA TIGHTENS INDIVIDUAl
INCOME TAXATION ON CAPITAl
GAINS FrOM EQUITY TrANSFEr
08 PrC TAX TrEATMENT ON
SHANGHAI – HONG KONG STOCK
08 ZHEJIANG IMPlEMENTS NEW
rEGUlATIONS ON CrOSS BOrDEr
09 CONSUMPTION TAX POlICIES
ADJUSTED BY THE FINANCE AND
10 NEW CHINA-SWITZErlAND
DOUBlE TAXATION AGrEEMENT
COMES INTO FOrCE
12 COMPrEHENSIVE DOUBlE TAX
AGrEEMENT WITH THE UNITED
12 HONG KONG EXCHANGES
NOTES WITH JAPAN rEGArDING
ON AVOIDANCE OF DOUBlE
AGrEEMENT WITH THE UNITED
STATES FOrMAllY SIGNED
13 PrOPOSED STAMP DUTY WAIVEr
FOr EXCHANGE TrADED FUNDS
13 ASIA PACIFIC TAX ADMINISTrATION
TASK FOrCE ESTABlISHED
13 2014 ANNUAl MEETING
BETWEEN THE INlAND rEVENUE
DEPArTMENT AND THE
HONG KONG INSTITUTE OF
CErTIFIED PUBlIC ACCOUNTANTS
14 CONVICTIONS ON SAlArIES TAX
IN THIs IssuE…
Welcome to the latest issue of our Tax Newsletter.
A number of developments have taken place in the PRC and Hong
Kong that could be of legal and tax significance to your businesses.
In the PRC, the People’s Bank of China (“PBOC”) issued a
circular allowing two-way cross border RMB cash poolings to
be open to multinational corporations nationwide. The Ministry
of Finance (“MOF”) and the State Administration of Taxation
(“SAT”) also jointly issued a circular confirming the continuance
of preferential income tax treatments for Advanced Technology
Service Enterprises (“ATSE”) for the period from 1 January 2014
to the end of 2018. Further, the SAT promulgated a public notice to
clarify certain implementation issues on accelerated depreciation
of fixed assets and a public announcement to codify individual
income taxation treatments on capital gains of various equity
transfers. With regards to the Shanghai-Hong Kong Stock Connect
program (“Stock Connect”), the China Securities Regulatory
Commission (“CSRC”), MOF and SAT jointly released a notice
concerning PRC tax treatments on investments via Stock Connect.
In order to enhance anti-avoidance tax laws, Zhejiang issued a
circular to strengthen the supervision on various cross-border
transactions. Various consumption tax policies were also adjusted
by the finance and tax authorities. Last but not least, the newly
signed China-Switzerland double taxation agreement came into
force on 15 November 2014 and applies to income derived from
1 January 2015 onwards.
In Hong Kong, a comprehensive double tax agreement was
signed with the United Arab Emirates. Further, notes were
exchanged between the HKSAR Government and the Japan
Government regarding their existing double tax agreement.
The intergovernmental agreement with the United States, which
facilities compliance with the US Foreign Account Tax Compliance
Act, has formally been entered into. In order to promote the
development of exchange traded funds (“ETFs”), the HKSAR
Government proposed to waive stamp duty for the transfer of
ETFs shares or units. In addition, the Study Group on Asian Tax
Administration and Research established a task force to allow the
Asia-Pacific region to engage in discussions and remain updated on
international developments. Also, the annual meeting between the
Inland Revenue Department (“IRD”) and the Hong Kong Institute
of Certified Public Accountants (“HKCPA”) was held where many
important issues were discussed. Finally, the IRD has reported
some tax avoidance cases during the two months.
We welcome your feedback and any questions you may have about
this issue of the Tax Newsletter.
T +852 2103 0759
T +852 2103 0722
FOr FUrTHEr INFOrMATION, PlEASE CONTACT:
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04 | Tax Newsletter
rEPUBlIC OF CHINA
TWO-WAY CrOSS BOrDEr rMB CASH POOlING AllOWED FOr MNCS
NATIONWIDE IN CHINA
On 1 November 2014, the PBOC issued the Circular on Matters Relating to Centralized Operation of
Cross-border Renminbi Funds Carried out by Multinational Enterprises Groups (Yin Fa , No. 324,
hereinafter the “Circular”) to accelerate the internationalization of the RMB. The Circular makes
the centralized operation of the cross-border RMB funds open to multinational groups nationwide,
following the success of the pilot scheme in the China (shanghai) Pilot Free Trade Zone in early 2014.
The Circular allows the operation of multinational groups’ cross-border RMB funds in China, including:
a) two-way cross-border RMB cash pooling; and
b) centralized cross-border RMB settlement under the current account items.
The following are the highlights of the Circular:
1. The eligibility of multinational groups for implementation of the two-way cross-border RMB
■ Both onshore and offshore participating member companies of the multinational group shall have
operated for more than three years;
■ Total revenue for the preceding year of the domestic member companies should be no less
than RMB 5 billion; and
■ Total revenue for the preceding year of the overseas member companies should be no less than
RMB 1 billion.
2. The restrictions on the two-way cross-border RMB cash pooling:
■ In principle, a multinational group may only set up one RMB cash pool via a special RMB account
in China. If several cash pools are set up with various banks, a recordal with the PBOC will be
required. In addition, each domestic member company is merely allowed to attend one of the
■ RMB funds in the cash pool(s) shall not be used to invest in securities, financial derivatives and
properties not for self-use purpose, or purchase financial products or offer entrusted loans to
■ PBOC sets an upper-limit for the net cross-border RMB inflows of the cash pool, which is based on
the owner’s equity, but no limit on the outflow for the time being.
3. The operation of the two-way RMB cash pool is subject to a recordal filing with the PBOC’s
competent local counterparts.
4. A multinational group may, through one domestic member company, open RMB settlement
accounts with several banks in China to handle centralized receipts and payments of cross-border
RMB under the current account items for its member companies.
With the implementation of the Circular, we believe multinational groups may better support their
regional and global operations through the aforesaid cash pooling arrangement which undoubtedly
would increase the efficiency and decrease the related costs in respect of funds flowing in and out
of China. There are still some unclear issues in the Circular about the practical operations and
implementation. We will closely monitor the development and provide up-to-date information.
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ADVANCED TECHNOlOGY SErVICE ENTErPrISES CONTINUE TO ENJOY
PrEFErENTIAl INCOME TAX TrEATMENTS
The MOF and the sAT jointly issued the Circular on Issues regarding Improving Enterprise Income Tax
Policies for Advanced Technology Service Enterprise (“Circular 59”), which has been effective from
1 January 2014. Circular 59 confirmed the continuance of the preferential income tax treatment for
ATsE for the period from 1 January 2014 to end of 2018.
According to Circular 59, an enterprise which satisfies the following requirements may qualify as an ATsE.
■ A legal person registered and operating in one of the 21 listed cities;
■ Engages in one or more Advanced Technology services (“ATS”) specified in the Recognition Scope
of Technologically Advanced Services (Trial Version), by using advanced technologies or with relatively
strong research and development capacity;
■ More than 50% of its employees have academic degrees of junior college or higher ;
■ More than 50% of its annual income is generated from undertaking ATs activities; and
■ At least 35% of annual income is generated from undertaking ATs activities provided to offshore
service recipients, i.e. “Offshore Outsourcing services” including Information Technology
Outsourcing (“ITO”), Business Process Outsourcing (“BPO”), and Knowledge Process
under Circular 59, qualified ATsEs registered and operated within the prescribed cities1 may continue
to enjoy the following preferential enterprise income tax (“EIT”) treatments, as previously provided to
ATsEs by Caishui  No. 65 (“Circular 65”).
■ A reduced EIT rate of 15%; and
■ Deduction on expenditures related to the statutory employees’ education fee (not exceeding 8%
of total salaries and wages) upon calculating the taxable income. The remaining amount exceeding
8% can be carried forward to following tax years.
In comparison with the previous Circular 65, Circular 59 has relaxed the percentage requirement on
Offshore Outsourcing services from 50% to 35%, which apparently will entitle more service enterprises
which are focusing on China domestic markets to enjoy the aforesaid preferential tax treatment.
The actual ATsE certification procedures will be subject to the adjustment and clarification by local
authorities in the relevant 21 listed cities. service enterprises that may benefit from this policy should
be alert and check with the application window in relation to the relevant certification requirements
from now on up to the period for the 2014 annual income tax filing.
FUrTHEr ClArIFICATION ON THE IMPlEMENTATION OF ACCElErATED
DEPrECIATION OF FIXED ASSETS
Following the issuance of Caishui  No. 75 (“Notice 75”) in relation to the guideline of
accelerated depreciation treatments for fixed assets, the sAT promulgated Public Notice 
No. 64 (“Notice 64”) to further clarify certain implementation issues for accelerated depreciation
treatments, which has been effective retroactively from 1 January 2014.
According to Notice 64:
■ The six specified industries stated under Notice 75 eligible for accelerated depreciation of fixed
assets shall be determined according to the industrial classifications issued by the National Bureau
of statistics. To be qualified to apply for the accelerated depreciation method, enterprises in these
six specified industries shall derive more than 50% of their total revenue from their main business in
the year of using the acquired fixed assets.
06 | Tax Newsletter
1 The Circular only applies to enterprises registered and operated in the following 21 service Outsourcing Demonstration
Cities: Beijing, Tianjin, shanghai, Chongqing, Dalian, shenzhen, Guangzhou, Wuhan, Harbin, Chengdu, Nanjing, Xi’an, Jinan,
Hangzhou, Hefei, Nanchang, Changsha, Daqing, suzhou, Wuxi and Xiamen.
■ R&D activities indicated under Notice 75 should be assessed according to the criteria stipulated for
R&D super-deduction or the guidelines for recognition of New and High Technology Enterprises.
■ For fixed assets with a unit price of less than RMB 5,000, the depreciation expense could be
deducted in one lump sum.
■ Enterprises could select the most favorable accelerated depreciation policy in respect of the
relevant fixed assets, however, such policy cannot be changed once selected.
■ To simplify the application formalities, qualified enterprises only need to submit a statistical form
during their provisional EIT filings to enjoy the above treatment. Nevertheless, a post record-filing
administration will be imposed on the annual EIT filings.
Notice 64 aims to provide certainty and more detailed guidelines with respect to the accelerated
depreciation policy for the relevant fixed assets. It also aims to reduce the administration burden on
the enterprises, as well as improving their cash flow position.
CHINA TIGHTENS INDIVIDUAl INCOME TAXATION ON CAPITAl GAINS FrOM
The sAT recently promulgated the Public Announcement  No. 67, Administrative Measures for
Individual Income Tax on Income from Equity Transfers (for Trial Implementation) (“Equity Transfer
Measures”), effective on 1 January 2015. The Equity Transfer Measures superseded certain recent
rules issued in 2009 and 2010 on the individual income tax (“IIT”) on capital gains from equity transfer.
As background, the PRC Individual Income Tax Law (“IIT law”) categorizes income of individual
taxpayers into different categories and applies different IIT rates respectively. Transfer of equity is
generally taxed under the category of transfer of properties. The net income or gains from such
transfer are subject to IIT at the flat rate of 20%.
The Equity Transfer Measures will be applicable to transfer of shares or equity in PRC registered
enterprises (excluding sole proprietorships and partnerships). However, the transfer of stock in
publicly listed companies through stock exchanges in shanghai and shenzhen are excluded and not
subject to the Equity Transfer Measures. under the current policy, the capital gains from trading
of stock in public companies listed in shanghai and shenzhen stock exchanges are exempt from
The Equity Transfer Measures are so far the most comprehensive IIT rules on equity transfer,
consisting of six chapters including General Principles, Recognition of Income from Equity
Transfer, Determination of Basis of Equity, Tax Declaration, Tax Collection and Administration,
The Equity Transfer Measures have codified the current IIT rules, and clarified certain technical
issues on how to calculate the capital gains from equity transfer (such as income recognition and
determination of basis). They have also introduced some new procedural requirements, which
will help the collection of IIT on capital gains by the PRC tax authorities, but will increase the
compliance burden on individual taxpayers (transferors), withholding agents (the transferees),
as well as underlying companies of which the equity is transferred.
For overview of the Equity Transfer Measures, please refer to our recent Client Alert issued on
16 January 2015 in the following link:
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08 | Tax Newsletter
PrC TAX TrEATMENT ON SHANGHAI – HONG KONG STOCK CONNECT PrOGrAM
The MOF, the CsRC and the sAT jointly released Caishui  No. 81 (“Notice 81”) on PRC tax
treatments with respect to stock Connect.
under Notice 81:
■ HK investors investing in China A- shares via stock Connect could be temporarily exempted from
PRC EIT or IIT on capital gains derived from transfer of A-shares, while HK investors would be
subject to 10% PRC withholding income tax on dividends received from investing in A-shares.
■ For PRC individual investors, capital gains derived from transfer of HK stocks could be temporarily
exempted from IIT, while dividends received from HK stocks would be subject to IIT at 20%.
■ For PRC corporate investors, both the capital gains derived from transfer of HK stocks and the
dividends received from investing in HK stocks would be subject to EIT. Nevertheless, the PRC
corporate investors could still enjoy EIT exemption on the dividends received from investing in
H-shares which have been held for no less than 12 months.
■ Business Tax on capital gains derived from transfer of A-shares or investing in HK stocks would also
be temporarily exempted.
Notice 81 has come into effect on 17 November 2014 since the stock Connect was launched. It is
applauded that Notice 81 has provided more certainty and preferential tax treatments to investors in
the stock market.
ZHEJIANG IMPlEMENTS NEW rEGUlATIONS ON CrOSS BOrDEr TrANSACTIONS
China has demonstrated tremendous interests in strengthening the laws on anti-avoidance since 2014.
Zhejiang, as one of the most important provinces, has recently issued a circular of Opinions of Zhejiang
Provincial Office, SAT on Reinforcing the Administration of Cross-border Tax Sources (“Opinion”), about
further strengthening the supervision on cross-border transactions. The Opinion has been effective
from 6 November 2014.
The Opinion provides that the tax authorities shall specifically scrutinize the following six types of pricing
■ Buy-sell price: For instances, situations where gross margins of PRC resident entities may be
controlled by the overseas parent companies through fixing of non-independent buy-sell prices.
■ Royalties: For instances, situations where values of overseas Intellectual Properties (“IP”) may be
overly stated while PRC subsidiary’s contribution to IP has not been properly accounted for; or MNCs
may set up shell companies in tax havens and arrange for transfer of profits under licensing payments.
■ Service fees: For instances, situations where service fees may be inadequately allocated to the PRC
■ Compensation for provision of onshore services not justifiable: For instances, situations where PRC
subsidiaries, which bear the related costs for buy-sell from providing services to their parent
companies, are not adequately compensated.
■ Mis-match of functional profile with economic substance and profit level: For instances, situations where
PRC entities need to assume non-routine functions after supply chain integrations, however, the
profit levels of the PRC entities would not be adjusted accordingly.
■ Assuming “invisible” costs and expenses without adequate compensation: For instances, situations where some
MNCs may structure the strategies such that the PRC subsidiaries would need to bear certain “invisible”
costs and expenses leading to a marginally profitable or even loss position over the period of time.
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In addition, the Opinion stipulated that the tax authorities shall pay attention to debt-financed enterprises
to ensure they are in compliance with the thin-capitalization rules; cross border transactions with entities
located in tax havens, etc. It is also noted that the tax authorities shall use every possible means to identify
anti-avoidance cases, as well as strengthen administration on contemporaneous documentation and
formulate schemes against anti-avoidance cases.
Management of Non-resident Enterprises
The Opinion stipulated further measures in respect of non-resident enterprises with or without
establishments in China.
■ For non-resident enterprises with establishments in China, tax authorities shall specifically review
their sources of tax income.
■ For non-resident enterprises without establishments in China, tax authorities shall specifically
review their withholding tax source.
■ The Opinion also required tax officials to stringently review the permanent establishment and
beneficial ownership status of non-resident enterprises, etc. under the relevant tax treaties.
Last but not the least, in light of the increasing outbound investments into overseas markets, the sAT
has implemented measures to strengthen the reporting system to ensure overseas taxable income of
PRC originated enterprises is duly reported.
CONSUMPTION TAX POlICIES ADJUSTED BY THE FINANCE AND TAX
The MOF and sAT jointly issued the Circular on Adjusting Consumption Tax Policies, (Caishui 
No. 93, “Circular 93”), Circular on the Increase in Consumption Tax on Refined Oil (Caishui 
No. 94, “Circular 94”) and Circular on the Further Increase in Consumption Tax on Refined Oil (Caishui 
No. 106, “Circular 106”) on 25 November, 28 November and 12 December 2014 respectively.
Consumption tax is levied on luxury, non-essential or energy intensive goods and is considered as a major
means to influence taxpayers’ certain consumption patterns.
Based on Circular 93, effective from 1 December 2014, small-displacement motorcycles with a cylinder
capacity of no more than 250ml, vehicle tyre, leaded gasoline and ethanol are no longer subject to
consumption tax. The adjusted consumption tax policy is intended to alleviate the burden of low and
medium income people in counties and villages, and to eliminate potential double taxation and thus
reducing the overall manufacturing costs of certain industries.
On the other hand, Circular 94 and Circular 106 have increased the consumption tax charges on refined
oil, including gasoline, naphtha, mineral spirits and lubricants (from 1 yuan per litre to 1.4 yuan per litre),
and diesel, jet fuel and fuel oil (from 0.8 yuan per litre to 1.1 yuan per litre), effective from 13 December
2014. The increase in consumption tax charge on refined oil is to encourage energy saving and new energy
development. This is also consistent with the government’s intention to curb the over-exploitation of
natural resources and environmental damage.
10 | Tax Newsletter
NEW CHINA-SWITZErlAND DOUBlE TAXATION AGrEEMENT COMES INTO FOrCE
The new sino-swiss Avoidance of Double Taxation Agreement (“DTA”), signed in Beijing has come into
effect on 15 November 2014. The newly signed DTA replaced the previous version in 1990 and applies to
income derived from 1 January 2015 onwards.
salient points of the new DTA are as follows
1. Permanent Establishment (“PE”)
A building site or construction, assembly or installation project will constitute a PE only if it lasts more than
12 months, which is more favorable than the 6-month period under the old provisions.
For cross border services, a PE will be constituted only if such activities continue for more than 183 days
within any 12-month period (as opposed to 6 months within any 12-month period).
2. Business Profit Adjustment between related Parties
Related parties transfer pricing adjustments made to the enterprise by the tax authorities of one
Contracting state have to be reflected accordingly by the tax authorities in charge of the associated
enterprise of the other Contracting state. The relevant tax authorities of the Contracting states shall
consult each other for such adjustments if necessary.
3. Withholding Tax rates on Passive Income
■ Dividends – If the beneficial owner directly holds at least 25% of the total equity of the entity
paying the dividends, gross dividends may be taxed by the source state at the rate of 5%. 10% rate
would be applied in all other cases. Dividends paid to central bank or government agencies that are
mutually agreed would be exempted from withholding tax by the source state.
■ Interests – Interests may be taxed in the source state at the rate of 10%, which is consistent with
the old provisions. Tax exemption would continue to apply in the source state to interest payment
involving governments or governmental (or state) institutions.
■ Royalties – Royalties under the new DTA is taxed in the source state at the rate of 9%.
A “limitation of benefit” clause has been agreed and included in the relevant sections on passive income
under the new DTA as a measure for avoidance of tax treaty abuse.
4. Capital Gains
The new DTA gives the source state the right to tax capital gains from equity transfers in the following
■ The equity being disposed of represents more than 50% of the seller’s interest in real properties
(direct or indirect) in the source state; or
■ The seller, at any time during the 12-month period prior to the equity disposal, has held at least 25%
of the equity (direct or indirect) in the resident enterprise of the source state.
under the old provisions, in the case of equity transfer, the source state only has the right to levy tax if
the resident enterprise whose shares are transferred is land-rich, (i.e. majority of assets of the resident
enterprise are comprised of real properties).
In the recent years, China has re-negotiated DTAs with various European countries, including Germany,
uK, Netherlands, Denmark, etc. In addition to the above highlighted tax treatments, it is noted that the
relevant re-negotiated DTAs have introduced clauses with an aim to prevent treaty abuse and enhance
information exchange between the treaty countries.
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12 | Tax Newsletter
COMPrEHENSIVE DOUBlE TAX AGrEEMENT WITH THE UNITED ArAB EMIrATES
Hong Kong’s double taxation arrangement network has reached 32 in number on 11 December 2014, as
Hong Kong and the united Arab Emirates (the “UAE”) signed a comprehensive double tax agreement
In the absence of the DTA between the uAE and Hong Kong in the past, income earned by the uAE
residents in Hong Kong is subject to both the uAE and Hong Kong income tax. In addition, Hong Kong
companies with profits attributable to a permanent establishment in the uAE may be liable for tax in both
places if the profits are considered to be sourced in Hong Kong.
With the signing of the DTA, such double taxation will be avoided. Tax paid by the uAE residents in
Hong Kong will be allowed as a credit against the tax payable in the uAE. Also, any uAE tax paid by
Hong Kong companies will be allowed as a credit against the tax payable in Hong Kong.
HONG KONG EXCHANGES NOTES WITH JAPAN rEGArDING COMPrEHENSIVE
AGrEEMENT ON AVOIDANCE OF DOUBlE TAXATION
With reference to the Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with respect to Taxes on Income entered into between the Government of the Hong Kong sAR
and the Government of Japan on 9 November 2010 (the “Agreement”) and the Protocol which forms
an integral part of the Agreement, the two Governments exchanged notes regarding Article 25 of the
Agreement on Exchange of Information (“EoI”) on 10 December 2014.
The purpose of the exchange of notes between the two Governments is to expand the coverage of tax
types under the EoI arrangement provided in the Agreement. In addition to the income taxes covered by
Article 2 of the Agreement, information concerning the following taxes of Japan shall also be exchanged in
accordance with the EoI provisions under the Agreement:
a. the inheritance tax;
b. the gift tax;
c. the consumption tax; and
d. any identical or substantially similar taxes that are imposed after the signing of the notes in addition to,
or in place of, the existing taxes referred to in (a), (b) and (c) above.
such exchange of notes will come into effect after the completion of ratification procedures and notification
by both Hong Kong and Japan. In the case of Hong Kong, an order, which is subject to the Legislative
Council’s negative vetting, is required to be made by the Chief Executive in Council under the IRO.
INTErGOVErNMENTAl AGrEEMENT WITH THE UNITED STATES FOrMAllY SIGNED
Further to our May/June 2014 Newsletter, where we discussed Hong Kong and the united states’
agreement over the substance of an intergovernmental agreement (“IGA”) to facilitate compliance
with the us Foreign Account Tax Compliance Act, the IGA was formally signed on 13 November 2014.
under the IGA, foreign financial institutions (“FFIs”) in Hong Kong are required to report account
information of us taxpayers to the us Internal Revenue service (“IrS”) directly. Group requests can
also be made by the IRs, on a need basis, for exchange of information at the government level. Further,
the IGA requires FFIs to conclude separate individual agreements with the IRs and to obtain consent
from account holders who are us taxpayers for reporting their information to the IRs.
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PrOPOSED STAMP DUTY WAIVEr FOr EXCHANGE TrADED FUNDS
ETFs are not defined under any laws in Hong Kong. With regards to the nature of their operation in
Hong Kong, they refer to open-ended collective investment schemes with shares or units listed or traded
on the stock Exchange of Hong Kong. Currently, Hong Kong imposes stamp duty on the transfer of ETF
shares and units for ETFs with their registers of holders maintained in Hong Kong and with more than
40% of Hong Kong stocks in their portfolios. The buyer and the seller each needs to pay 0.1% of the
transaction value as stamp duty (0.2% in total).
In order to promote the development of ETFs, the Hong Kong Government proposed to waive the
stamp duty for the transfer of all ETFs shares or units in the 2014-2015 Budget. The stamp Duty
(Amendment) Bill 2014, which seeks to amend the stamp Duty Ordinance (Cap.117), was gazetted
on 5 December 2014 and was introduced into the Legislative Council for First Reading of the Bill
on 17 December 2014. The proposed stamp duty waiver will be effective when the stamp Duty
(Amendment) Ordinance is published in the Gazette after its enactment by the Legislative Council.
ASIA PACIFIC TAX ADMINISTrATION TASK FOrCE ESTABlISHED
The study Group on Asian Tax Administration and Research (“SGATAr”), an organization consisting
of tax administrators in the Asia-Pacific region1, held a meeting on 24-27 November 2014. Issues
discussed during the meeting included globalisation and the erosion of the tax base, the operation of
multinational entities, seamless exchange of information and the use of bulk data, and opportunities for
capability development across all fields of tax administration.
During the meeting, sGATAR resolved to create a task force to allow the Asia-Pacific region to
engage in discussions and remain updated on international developments. The task force will promote
cooperation and support the development of cohesive tax systems by enabling sGATAR members to
share best practices and experiences, seek assistance and implement initiatives.
2014 ANNUAl MEETING BETWEEN THE INlAND rEVENUE DEPArTMENT AND THE
HONG KONG INSTITUTE OF CErTIFIED PUBlIC ACCOUNTANTS
The minutes of the 2014 Annual Meeting between the IRD and the HKCPA has been published
recently. The key issues discussed in the meeting includes:
1. Source rule for determining dividend income [Part A(a)]
In the 2011 Annual Meeting, the IRD stated that where the Inland Revenue Ordinance (“IrO”) section
26 exemption for dividends received from company chargeable to profits tax in Hong Kong did not
apply, only those dividend income that was sourced in Hong Kong would be assessed under section
14 of the IRO. The IRD elaborated that dividends received from the mere holding of an investment
or interest in an entity will be taxable depending on the place of operation of the entity. For asset
management company deriving management fees and performance fees, if the fees are made payable
in the form of dividends, such dividends would be sourced and taxable in Hong Kong if the asset
management services were rendered in Hong Kong.
2. Share-based payments [PartA (f) and (g)]
If the Hong Kong branch of an overseas listed company incurred costs in acquiring its own shares
from the overseas market as treasury stock, and uses the acquired treasury stock to grant share
options/awards to its employees as share-based payment, the expense would be deductible. On
the contrary, if the company is a Hong Kong incorporated company instead, the shares it bought
back would be treated as cancelled under the Companies Ordinance and the subsequent issue to its
employees is considered a new issue of shares. The expense would therefore not be deductible as
share-based expense for fulfillment of stock option or share award granted to employees by issuing
new shares is not an “outgoing” or “expense” deductible under section 16(1) of the IRO.
sGATAR members: Australia, Cambodia, People’s Republic of China, Hong Kong sAR, Indonesia, Republic of Korea, Macau
sAR, Malaysia, Mongolia, New Zealand, Papua New Guinea, The Philippines, singapore, Chinese Taipei, Thailand, Vietnam
14 | Tax Newsletter
For group companies with senior employees centralized at an employing company and provide services
to other operating group companies, if the employing company operates a share-based scheme, the
share-based expense recognized as an accounting expense during the vesting period is not an outgoing
or expense already incurred under section 16(1) of the IRO. Further if, the service fees payable by the
employing company to the operating company were based on the costs incurred or cost plus, at arm’s
length and not excessive, no tax adjustment which applies to the employing company (i.e. only allowing
amount recharged on the date of vesting) would be made for the operating company.
3. Corresponding amendments to IrO as a result of the introduction of new
amalgamation procedures under the New Companies Ordinance [PartA (h)]
The new Companies Ordinance introduce a new court-free procedure to amalgamate companies
within a group. The IRD has been studying the relevant tax issues (including late filing of return by the
amalgamating entity, the penalty issue and tax reserve certificate issue) relating to the new regime and
suggest taxpayers might in the interim seek an advance ruling on how the provisions of the IRO would
apply to a company amalgamation.
4. Application of Section 61B to change in indirect shareholding in corporation with
accumulated tax loses [PartA (j)]
section 61B of the IRO disallow set off of tax losses where there is “any change in the shareholding
in a corporation”, the IRD explained that the wording were potentially very wide in scope and could
include changes in beneficial interest. The IRD will however normally only invoke section 61B for
changes in shareholding for shares that were transferred from one person to another.
5. Taxation of Investment managers/advisors [PartB2]
It has come to the IRD’s attention that in some cases, even though the investment managers/advisors
performed significant functions and bore significant risks in generating the profits of the funds, the
management and performance fees paid to the investment managers/advisors who offered professional
services in Hong Kong to hedge funds or private equity funds established outside of Hong Kong, were
computed on a cost-plus formula, far below the arm’s length rate. However, it is unclear as to what
amounts to bearing significant risks in generating the profits of the funds. Hopefully, the IRD can
provide additional guidance on this.
Nevertheless, the IRD is of the view that even though the compensation structures for the investment
managers/advisors may vary from fund to fund, the “2 and 20” (i.e. the lead fund managers took 2% of
the fund’s assets each year as a management fee, and 20% of the total profits as a kind of performance
bonus) will be considered as the standard pay formula Therefore, remuneration arrangement different
from this standard pay formula is more likely to be subject to scrutiny by the IRD.
CONVICTIONS ON SAlArIES TAX EVASION
under the Inland Revenue Ordinance (Cap.112) (“IrO”), tax evasion is a criminal offence. The maximum
penalty for each charge, upon conviction, is three years’ imprisonment, a fine of HK$50,000, and a further
fine of three times the amount of tax which has been undercharged as a result of the offence. Two recent
convictions on the evasion of salaries tax resulting in suspended jail sentences are describe below.
1) False claims for deductions of expenses for self-education and approved charitable donations
Expenses of self-education paid for prescribed courses or examination fees paid to specified education
providers and donations made to any charitable institutions or trust of a public character which is
exempt from tax under section 88 of the IRO or donations made to the Hong Kong sAR Government
for charitable purposes are tax deductible. The documentation evidence supporting the claims for
tax deduction should be retained for seven years. Taxpayers will be asked to produce the relevant
supporting evidence when their claims are selected for random audit checks conducted by the IRD.
www.dlapiper.com | 15
On 19 November 2014, a managerial staff at a hotel in Hong Kong (the taxpayer), was convicted on
eight charges of evading salaries tax. Contrary to section 82(1)(c) of the IRO, the defendant, wilfully
with intent to evade tax, had made a number of false statements in relation to claims for deductions in
his tax returns for the years of assessment 2003-04 to 2010-11.
The defendant had claimed deduction of expenses of self-education and approved charitable donations
in each of his tax returns for the years of assessment 2003-04 to 2010-11. The total deduction
claims for self-education and approved charitable donations for these eight years of assessment were
HK$699,150 and HK$58,000 respectively. In particular for the years of assessment 2008-09 to 2010-11,
he had alleged that:-
a. the expenses of self-education were paid to assist the education of his relative; and
b. the charitable donations were given to a family member to distribute to various charities.
The IRD’s investigation subsequently reveals that the defendant failed to produce any details or
documentation in support for his tax deduction claims for expenses of self-education and approved
charitable donations. The total amount of the false deduction claims for the eight years of assessment
from 2003-04 to 2010-11 was HK$757,150, and the total amount of tax evaded was HK$82,285. The
defendant pleaded guilty to all eight counts of evading tax and was consequently sentenced to two
months’ imprisonment, suspended for three years.
2) False claims for additional dependent grandparent and additional dependent parent allowances
similarly on 26 November 2014, a taxpayer was convicted on a total of nine charges of salaries tax
evasion. Contrary to section 82(1)(c) of the IRO, the defendant had wilfully and intentionally evaded tax
by making false statements in her tax returns relating to claims for additional dependent grandparent
allowance (“ADGA”) and additional dependent parent allowance (“ADPA”) for the years of assessment
2003-04 to 2009-10 and years of assessment 2008-09 to 2009-10 respectively. she falsely declared that:
a. during the seven years of assessment from 2003-04 to 2009-10, her grandmother resided with her
continuously for each full year; and
b. during the two years of assessment from 2008-09 to 2009-10, her parents resided with her
continuously for each full year.
However, the IRD’s investigation reveals the following facts:
a. The defendant herself resided at Wan Chai in particular for the years of assessment from 2008-09
b. The defendant had not resided with her parents continuously for any of the years from 2008-09
to 2009-10; and
c. The defendant’s grandmother had resided in New York for years, and the relevant records from
the Hong Kong Immigration Department shows that there had been no movement records for her
grandmother since 2002.
The total amount of the defendant’s false claims of ADGA and ADPA for the seven years of assessment
from 2003-04 to 2009-10 was HK$330,000, and the total amount of tax involved was HK$57,066.
The defendant pleaded guilty to all nine counts of evading tax and was consequently sentenced to two
months’ imprisonment, suspended for two years.
This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not be used as, a substitute
for taking legal advice in any specific situation. They are not legal advice, and should not be used as a substitute for taking legal advice in any specific
situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication.
Like all other foreign law firms with offices in the People’s Republic of China (PRC) we are not permitted under existing law to advise on the laws of the
PRC. The views expressed in this publication as to the laws and regulations of the PRC are based on our own research, experience and the advice of our
correspondents in the PRC.
DLA Piper Hong Kong is part of DLA Piper, a global law firm operating through various separate and distinct legal entities. Further details of these
entities can be found at www.dlapiper.com.
DLA Piper uK LLP is part of DLA Piper, a global law firm operating through various separate and distinct legal entities. Further details of these entities
can be found at www.dlapiper.com.
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Copyright © 2015 DLA Piper. All rights reserved. | FEB15 | 2888939
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