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These notes are issued for the information of taxpayers and their tax - page 37 / 68

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95.

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.

Article 12

ROYALTIES

96.

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

cases.

97.

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.

98.

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):

  • (1)

    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;

  • (2)

    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,

    • i.

      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).

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