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These notes are issued for the information of taxpayers and their tax - page 39 / 68

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Mainland residents have a permanent establishment situated in Hong Kong, and the right in respect of which the royalties are paid is effectively connected with that permanent establishment, the royalties concerned will be included in the computation of the profits of that permanent establishment. The profits of that permanent establishment will be taxed in accordance with the provisions of Article 7 (Business Profits). The limitation of tax rate as provided for in Article 12 would have no application.

Article 13

CAPITAL GAINS

101.

Article 13 allocates the right of tax on the gains from the alienation

of property.

It should be noted that Article 13 does not distinguish as to the

nature of the capital gains.

Accordingly, “capital gains” may include gains of

a capital nature and gains of a revenue nature (speculative gains).

102.

Paragraph 1 of Article 13 deals with gains derived by a resident of

One Side from the alienation of immovable property situated in the Other Side. Paragraph 2 of Article 13 deals with gains derived from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of One Side has in the Other Side, including gains from the alienation of such a permanent establishment. Both paragraphs allow the Other Side to impose tax. This is consistent with the principle on the allocation of taxing rights as provided for in Article 6 (Income from Immovable Property) and Article 7 (Business Profits). The term “movable property” means all property other than immovable property, including

intangible assets such as goodwill.

103.

Gains derived by an enterprise of One Side from the alienation of

ships or aircraft or land transport vehicles operated in shipping, air and land transport or movable property pertaining to the operation of such ships, aircraft or land transport vehicles, shall be taxable only in that Side under the provisions of paragraph 3 of Article 13. This is consistent with the principle on the allocation of taxing rights as provided for in Article 8 (Shipping, Air and

Land Transport).

104.

Paragraphs 4 and 5 of Article 13 deal with gains derived from the

alienation of shares in a company.

35

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