As Hong Kong only taxes interest arising in Hong Kong from
business carried on in Hong Kong, the limitation of tax rates does not have any
practical application in Hong Kong.
The provisions of Article 12 and the criteria for determining the
locality of the source are the same as those for Article 11. Regarding the limitation of the tax rate, it is 7% of the gross amount of the royalties in all
The definition of “royalties” as provided for in paragraph 3 of Article
12 is wide enough to cover the provisions of paragraphs (a), (b), (ba) and (d) of
section 15(1) of the Ordinance.
Where a resident of the Mainland receives royalties which are
deemed to be chargeable to tax under paragraphs (a), (b) and (ba) of section 15(1) of the Ordinance, the Mainland resident is taxed at the following rates by
virtue of section 21A (1)(b):
corporations – at a tax rate of 17.5% (the tax rate for the year 2007/08 is 17.5%) on 30% of the gross amount, i.e. 5.25% of the gross amount;
persons other than corporations – at a tax rate of 16% (the tax rate for the year 2007/08 is 16%) on 30% of the gross amount,
e. 4.8% of the gross amount.
Since the Comprehensive Arrangement has entered into force, as the applicable tax rate is 7% which is higher than the rates mentioned above, royalties arising in Hong Kong and paid to a resident of the Mainland will be taxed at the effective rate (i.e. 5.25% or 4.8%) instead of the rate as provided for in the Comprehensive Arrangement. However, if royalties arising in Hong Kong and paid to a resident of the Mainland are part of a scheme directed at exploiting section 21A of the Ordinance, the Comprehensive Arrangement will not prejudice the right of Hong Kong to apply its laws and measures concerning tax avoidance (see paragraph 158 below).