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These notes are issued for the information of taxpayers and their tax - page 34 / 68

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the fulfillment of the obligation to put funds at the disposal of the shareholder in the manner required by contract or by custom.

85.

Paragraph 2 of Article 10 provides that such dividends may also be

taxed in the Side of which the company paying the dividends is a resident (i.e.

the Side of source) and according to the laws of that Side. in 2 tiers, shall not exceed:

The tax so charged,

  • (1)

    where the beneficial owner is a company directly owning at least 25% of the capital of the company which pays the dividends, 5% of the gross amount of the dividends;

  • (2)

    in any other case, 10% of the gross amount of the dividends.

86.

As dividends are not chargeable to tax in Hong Kong, the limitation

of tax rates has no practical application in Hong Kong. It is also stipulated in paragraph 2 of Article 10 that the limitation of tax rates on dividends will not affect the taxation of the company in respect of the profits out of which the

dividends are paid.

87.

Paragraph 3 of Article 10 defines the term “dividends” to mean

“income from shares or other rights, not being debt-claims, participating in profits” and “income from other corporate rights which is subjected to the same taxation treatment as income from shares under the laws of the Side of which the company making the distribution is a resident”. The first part of the meaning makes it clear that the relevant income must be derived from

shareholding rather than debt-claims.

The second part links the definition to

the laws of the Side of which the company paying the dividends is a resident.

88.

The provisions of Article 7 (Business Profits) shall apply if the

beneficial owner of the dividends, being a resident of One Side, carries on business in the Other Side (of which the company paying the dividends is a resident) through a permanent establishment situated therein, and the shareholding in respect of which the dividends are paid is effectively connected

with that permanent establishment.

89.

In respect of the taxation on dividends, paragraph 5 of Article 10

further provides that dividends paid by, or undistributed profits of, a company

30

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