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These notes are issued for the information of taxpayers and their tax - page 42 / 68





42 / 68

company’s accounting year-end accounts (with the exception of tax planning cases).


Before the Second Protocol became effective, gains derived from the

alienation of “shares”, other than shares referred to in paragraph 4 of Article 13,

of not less than 25% of the entire shareholding of a company which is a resident of One Side may be taxed in that Side under the provisions of paragraph 5 of Article 13. Hong Kong interprets the word “shares” as referring to shares sold at the time of alienation, rather than the total shares in a

company held or once held shares alienated are not less may gains derived from the

by the alienator. In other words, it is than 25% of the entire shareholding of alienation be taxed in that Side. It is

only when a company understood

that the Mainland interprets “25%” as referring to 25% or more of the shares a company once held by the alienator. That is, if shares representing 25%

in or

more of the entire shareholding of a Mainland company were once Hong Kong resident, gains derived by the Hong Kong resident alienation of all or part of his/its shareholding may be taxed in the

held by a from the Mainland.

After negotiation, the State Inland Revenue Department

Administration of Taxation reached a consensus that the

and the Hong


“25%” applied

to the

shares held by the alienator. set a time frame of 12 months

Under the Second for the purpose of

Protocol, both Sides agreed to deciding whether the alienator

has “once held” at least 25% shares prior to the effective

of the shareholding. However, the alienation of date of the Second Protocol (i.e. 11 June 2008)

would not be affected Second Protocol, gains

by this



According to


by a

resident of

One Side from

Article 5 of the the alienation of

shares in the capital of a company which is taxed in that Other Side if, at any time alienation, the recipient of the gains had a

a resident of the Other Side may be within the 12 months before the participation, directly or indirectly,

of not less than 25% of the capital of the company.

Example 4

On 1 April 2006, a Mainland resident, Mr. Cheung, acquired 35%

o f t h e e n t i r e s h a r e h o l d i n g o f a H o n g K o n g c o m p a n y , C o m p a n y C .

Mr. Cheung made a profit in selling 25% and 10% shares of Company C on 1 May 2007 and 23 June 2008 respectively.


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