Hong Kong and China sign double taxation pact

On August 21 2006, Hong Kong and China signed The Arrangement for the Avoidance of Double Taxation on Income & Prevention of Fiscal Evasion (Arrangement), which will eliminate double taxation and cut the top tax rates on direct income, such as operating profits and salaries, as well as indirect income, like dividends and interest.

Under the Agreement, investors who sell stakes of 25% or less in a PRC company are exempt from paying a 10% tax on the proceeds to the mainland because the tax right of the income, previously held by both jurisdictions, has been granted exclusively to Hong Kong. Double taxation occurs when a person or company that earns money in two jurisdictions ends up paying both governments for the same income or profits.

For individual Hong Kong residents, the top tax rate on dividend from investments in a PRC enterprise has been reduced from 20% to 10%. For Hong Kong businesses, the top withholding tax rate on interest and royalties received from PRC enterprises has dropped from 10% to 7%, and for residents from 20% to 7%.