Where a resident of the Mainland receives royalties which are
deemed to be chargeable to tax under section 15(1)(d) of the Ordinance (for example, hire charges for the use of or the right to use industrial, commercial and scientific equipment in Hong Kong), such a resident will be taxed subject
to the provisions of the Comprehensive Arrangement as follows:
Company A, a resident of the Mainland, derives from Hong Kong royalties of $900,000 during the year from 1 April 2007 to 31 March
After deduction of allowable expenses and depreciation
allowances in respect of the relevant equipment, the amount of assessable profits of Company A is $500,000 and the tax payable thereon is $87,500 (i.e. 9.7% of the gross amount), calculated at the rate of 17.5% (the tax rate for the year 2007/08 is 17.5%).
As the tax rate provided for in the Comprehensive Arrangement is 7% of the gross amount of royalties (i.e. $900,000 x 7%), the tax payable by Company A will be reduced to $63,000.
Same as Example 1 except that the amount of assessable profits of Company A is $300,000 and the tax payable thereon is $52,500 (i.e. 5.8% of the gross amount), calculated at the rate of 17.5% (the tax rate for the year 2007/08 is 17.5%).
As the tax rate provided for in the Comprehensive Arrangement is 7% of the gross amount of royalties, the tax payable remains as $52,500, unaffected by the Comprehensive Arrangement.
The provisions of Article 12 will not apply if the beneficial owner of
the royalties, being the Government of One Side, a local authority thereof or a resident of that Side, carries on business in the Other Side in which the royalties arise through a permanent establishment situated therein, and the right or property in respect of which the royalties are paid is effectively connected
with that permanent establishment.
In such a case, the provisions of Article 7
(Business Profits) will apply.
In other words, if the abovementioned