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These notes are issued for the information of taxpayers and their tax - page 40 / 68

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40 / 68

105.

Under

the

provisions

of

paragraph

4

of

Article

13,

gains

derived

from the alienation of shares in a company the assets of which are comprised, directly or indirectly, mainly of immovable property situated in One Side may be taxed in that Side. Both Sides, pursuant to paragraph 2 of the Protocol, take 50% as the benchmark in determining whether the assets of a company are comprised “mainly” of immovable property. Where the value of immovable property is not less than 50% of the value of the total assets of a company, the assets of that company will be deemed to be comprised mainly of immovable property. In calculating the value of the total assets of a company, debts of that company (including liabilities secured by mortgages on the relevant immovable property) must not be deducted. Both Sides hold different views as to the relevant point in time for deciding whether the value of immovable property equals or exceeds 50% of the value of the total assets of the company. Hong Kong holds the view that it means the time of the alienation of shares,

whereas the Mainland holds during which the alienator

the view held any

that it shares

means any time in in the company.

the period The State

Administration of Taxation has discussion with the Hong Department and then concluded the Second Protocol.

Kong Inland Revenue Both Sides agreed to

set a time frame of “3 years” immovable property equaled

for the purposes of deciding whether or exceeded 50% of the value of the

the value of total assets.

Though

the

State

Administration

of

Taxation

has

not

adopted

Hong

Kong’s

interpretation,

the

specification

of

a

time

frame

has

already

provided

more

certainty in the interpretation of this provision. discuss with the Mainland on this issue.

Hong Kong would continue to

106.

Before the Second Protocol became effective, Hong Kong will

calculate the value of assets on the basis of market value as at the time of the alienation of the shares concerned; whereas the Mainland will calculate the value on the basis of historical cost. In general, Hong Kong Inland Revenue Department will accept the last available audited financial statements of the company whose shares are alienated, supplemented by its management accounts up to the date of alienation of the shares (the latter may be unaudited), for the purposes of calculating the value of assets. In the Mainland, the value of assets is calculated at present on the basis of historical cost. The State Administration of Taxation has, however, agreed that notwithstanding the different bases adopted by the two Sides for their respective calculations, where the calculation satisfies the taxing conditions and tax is imposed in both Sides, the Side of residence should give credit to its resident for income doubly taxed.

36

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