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These notes are issued for the information of taxpayers and their tax - page 41 / 68





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For the alienation of shares on or after 11 June 2008 (effective date of the Second Protocol), both Sides will calculate the value of assets by reference to

the book value at the end of any of the 3 taxable years prior The calculation will base on generally accepted accounting include normal depreciation and revaluation provisions. example shows how the new calculation method is applied:

to the alienation. standards which The following

Example 3

On 1 May 2004, a Mainland resident Mr. Wong bought shares in

Company B, which closed its accounts annually on 31 December.

C o m p a n y B h e l d i m m o v a b l e p r o p e r t i e s i n H o n g K o n g , w i t h t h e

properties representing, as per the accounts at the end of the taxable y e a r , t h e f o l l o w i n g p e r c e n t a g e s o f t o t a l c o m p a n y a s s e t s :

  • (a)

    for 2004, 60%;

  • (b)

    for 2005, 40%;

  • (c)

    for 2006, 40%;

  • (d)

    for 2007, 40%.

Mr. Wong sold the shares of Company B on 23 June 2008 and made a profit.

The new rule will apply as the Second Protocol has become effective at the time of alienation, 23 June 2008. The book value at the end of the 3 taxable years prior to the alienation will be used in

determining whether the “mainly” of immovable accounts for 2005 to 2007,

assets of Company B are comprised property. According to the year-end the immovable properties only accounted

for 40% of Company B property.

the total assets were not at any According to

of Company B. Hence, the assets of time comprised “mainly” of immovable paragraph 4 of Article 13 of the

Comprehensive Arrangement, Hong Kong does not have rights on the gains on alienation received by Mr. Wong.



In Hong Kong, the taxable year refers to the period from 1 April to 31 March of the next year. Hence, strictly speaking the Department should require Company B to provide annual accounts as at 31 March for each year from 2005 to 2007. In general, the Department would adopt a more flexible approach and would accept the relevant


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