Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

August 28, 2019
2019-6070

China and Hong Kong sign Fifth Protocol to treaty

Executive summary

China1 and Hong Kong signed the Fifth Protocol (the Protocol) to the current China-Hong Kong Income Tax Treaty (the Treaty) on 19 July 2019. The Protocol will enter into force in the tax year following the calendar year in which the ratification procedures are completed.

Significant provisions in the Protocol include:

  • Tie-breaker rule for a treaty residency determination for non-individual dual resident persons.
  • Clarification on the determination of Dependent Agency Permanent Establishment (Agency PE).
  • Disposal of shares or comparable interests in a Chinese land-rich entity.
  • Principal purpose test (PPT) for entitlement to benefits.

This Alert summarizes the key provisions of the Protocol.

Detailed discussion

Tie-breaker rule for non-individual dual resident persons agreement

When a person other than an individual is a dual resident, the competent authorities of both Contracting States will seek a determination by mutual agreement of the place of residence based on the place of effective management, the place of incorporation or otherwise constituted and any other relevant factors. In the absence of such agreement, the person will not be entitled to any treaty relief unless both competent authorities agree on.

Lower Agency PE threshold

Under the Protocol, in addition to the current provision of “habitually concludes contracts,”2 a dependent agent who “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise” will be sufficient to constitute an Agency PE.

Under the Treaty, an agent whose activities are “wholly or almost wholly performed on behalf of an enterprise of a contracting party” will be considered as a dependent agent. Under the Protocol, an agent will be treated as a dependent agent when the agent acts “exclusively or almost exclusively on behalf of one or more enterprises to which the agent is closely related.”3

Disposal of shares or comparable interests in a Chinese land-rich entity

The Treaty grants China the right to impose tax on a Hong Kong resident who disposes shares in a Chinese “land-rich” company. The Protocol extends China’s taxing rights to comparable interests in other entities such as partnerships and trusts.

However, the definition of a “land-rich” entity is slightly relaxed under the Protocol to “more than 50%” from “50% or more” of the underlying assets of an entity being immovable property situated in China.

Entitlement to benefits

Under the PPT, tax benefits otherwise granted under the Treaty will be denied if it is reasonable to conclude that one of the principal purposes of an arrangement or transaction is to secure a benefit under the Treaty.

Endnotes

1. The term refers to Mainland China.

2. Currently, the Treaty provides that when a dependent agent of an enterprise of a contracting party who habitually acts on behalf of the enterprise and has, and habitually exercises, an authority to conclude contracts in the name of the enterprise in the other contracting party, that enterprise will be deemed to have an Agency PE in the other contracting party.

3. The term “closely related” is broadly defined in the Protocol as follows: “based on all the relevant facts and circumstances, one [party] has control of the other or both are under the control of the same persons or enterprises…”

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong
  • David Chan | david.chan@hk.ey.com
  • Paul Ho, Financial Services | paul.ho@hk.ey.com
  • Jane Hui | jane.hui@hk.ey.com
  • Becky Lai | becky.lai@hk.ey.com
Ernst & Young LLP (United States), China Tax Desk
  • Min Fei, New York | min.fei@ey.com
  • Vickie Lin, New York | vickie.lin@ey.com
  • Ryan Lu, New York | ryan.lu@ey.com
  • Lucy Wang, Chicago | lucy.wang1@ey.com
  • Diana Wu, San Jose | diana.wu@ey.com
Ernst & Young LLP (United States), Hong Kong Tax Desk, New York
  • Rex Lo | rex.lo1@ey.com
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
  • Chris Finnerty | chris.finnerty1@ey.com
  • Kaz Parsch | kazuyo.parsch@ey.com
  • Bee-Khun Yap | bee-khun.yap@ey.com

ATTACHMENT

 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2024, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.

 


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or ey.com. Please refer to the privacy notice/policy on these sites for more information.


Yes, I accept         Find out more