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These notes are issued for the information of taxpayers and their tax - page 32 / 68

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Arrangement.

The competent authorities of both Sides would endeavour to

resolve the case presented within taxation not in Arrangement.

by mutual agreement. However, such a case must be 3 years from the first notification of the action resulting in accordance with the provisions of the Comprehensive

78.

As the issue of transfer pricing arising from the provisions on

“associated enterprises” is complicated, the Inland Revenue Department intends to publish a Departmental Interpretation and Practice Note on the subject. The Note will provide information and guidance on the time limit for claims, factors to be taken into consideration in relation to appropriate

adjustments, the tax adjustment methods, etc.

INCOME FROM INVESTMENT – DIVIDENDS, INTEREST AND ROYALTIES

79.

Income derived from investment activities is indirect or passive

income, and is different from profits from business activities. The taxation of such income (including dividends, interest and royalties) is governed by

specific Articles of the Comprehensive Arrangement.

80.

Under the Comprehensive Arrangement, the key principle in relation

to

business

profits

is

that

an

enterprise

of

One

Side

will

not

be

taxed

in

the

Other Side unless it carries on business in that Other Side through a permanent establishment situated therein. On the other hand, if the enterprise does carry

on business in the establishment may

latter manner, the profits attributable to

be

taxed

in

that

Other

Side.

However,

income,

the

Side

where

the

income

arises

has

the

taxing

rights

that permanent for investment even if there is

no permanent establishment situated therein.

81.

Although the Side of the source of investment income has the taxing

rights, this does not mean that the Side of which the recipient is a resident has no taxing rights. In other words, both the Side of source and the Side of residence are given the right to tax the same item of investment income (the Side of residence is required to give double taxation relief to its residents for any income doubly taxed, see paragraphs 128 to 140 below). It is specifically stipulated in the relevant provisions of the Comprehensive Arrangement that

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