Unilateral Taxation for Hong Kong Residents in China in 2007

The arrangement for avoidance of double taxation between Hong Kong and the Chinese mainland will be implemented in the 2007/08 financial year at the soonest. According to Commissioner of Inland Revenue of HKSAR, Mrs Lau Mak Yee-ming, the Arrangement between the Mainland of China and the HKSAR for Avoidance of Double Taxation clearly sets out where tax will be paid for a Hong Kong resident taking up employment or deriving income from indirect investments such as share dividend, interest and royalty fee on the mainland. Under this arrangement, double taxation can be avoided. The new measure will help attract more foreign direct investment to establish companies in Hong Kong and make use of the Hong Kong platform to enter the mainland market or go global.

Mrs Lau said the governments of both sides had in the past focused primarily on direct taxes. The new arrangement initialled in mid-April is more encompassing. In particular, it clarifies certain grey areas such as the tax liabilities of Hong Kong residents who earn salary or derive income from indirect investments on the mainland. The arrangement specifies which side (mainland or Hong Kong) has the right to collect tax under different circumstances, as well as the tax liabilities of the individual versus the company, so as to avoid taxation by both sides or by neither side. This will provide more comprehensive protection to Hong Kong residents working or investing in the mainland, as well as mainlanders investing in Hong Kong.

It is understood that many Hong Kong residents are being employed to work on the mainland nowadays. If a Hong Kong resident works more than 180 days a year on the mainland, he or she is liable for paying tax to the mainland authorities and is hence subject to double taxation. Many professionals and management executives considering working in the mainland are put off by this provision. Some Hong Kong companies with operations on the mainland agree to pay the mainland taxes for their Hong Kong employees in order to attract them to work across the boundary. This has in turn increased the investment cost of the company concerned. After the arrangement takes effect, Hong Kong residents working in the mainland will be entitled to the tax treatment stipulated therein. Implementation details will be announced after the governments of the two sides have signed the official documents.