Paragraphs 1 to 4 of Article 13 of the Comprehensive Arrangement will not apply. However, Hong Kong has the taxing rights on Mr. Cheung’s gains received from the alienation of 25% shares of Company C on 1 May 2007 (i.e. before the effective date of the Second Protocol), according to paragraph 5 of Article 13. Even though Hong Kong has the taxing rights, whether the gains would be taxed still depends on other factors, like whether the gains were capital or revenue in nature.
By the time Mr. Cheung sold the 10% shares of Company C on 23 June 2008 the Second Protocol has come into effect. As Mr. Cheung only had a participation of less than 25% of the capital of Company C during the 12 months prior to the alienation, his gains from the second sale of shares will not be subject to tax in Hong Kong according to the new rule under paragraph 5.
Gains derived from the alienation of any property, other than that
referred to in paragraphs 1 to 5 of Article 13, shall be taxable only in the Side
of which the alienator is a resident.
INCOME FROM EMPLOYMENT
Paragraph 1 of Article 14 provides that salaries, wages and other
similar remuneration derived by a resident of One Side in respect of an employment shall be taxable only in that Side unless the employment is exercised in the Other Side. If the employment is exercised in the Other Side, such remuneration as is derived therefrom may be taxed in that Other Side. However, remuneration derived by a resident of One Side in respect of an employment exercised in the Other Side will be exempt from tax in that Other
Side if all the following three conditions are satisfied:
the recipient is present in the Other Side for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable period concerned;