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.
certainty in the interpretation of this provision. discuss with the Mainland on this issue.
Hong Kong would continue to
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.