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These notes are issued for the information of taxpayers and their tax - page 5 / 68

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INTRODUCTION

On 11 February 1998, representatives of the Mainland of China (“the

Mainland”) and the Hong Kong Special Administrative Region (“Hong Kong”) signed a Memorandum that detailed an “Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation on Income” (“the Limited Arrangement”). The Limited Arrangement covers mainly business profits of an enterprise operating through a permanent establishment, shipping, air or land transport income, as well as income from personal services. Some two years later, on 2 February 2000, the Mainland and Hong Kong signed the “Air Services Arrangement between

the Mainland of China and the Hong (“the Air Services Arrangement”).

Kong

Special

Administrative

Region”

2.

However, with China’s subsequent accession to the World Trade

Organisation and the increasingly close economic ties between the Mainland and Hong Kong, both the Mainland and Hong Kong considered it necessary to expand the Limited Arrangement into a comprehensive arrangement for the avoidance of double taxation, i.e. one on a par with international standards. Accordingly, on 21 August 2006, the Mainland and Hong Kong signed an “Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income”(“the Comprehensive Arrangement”), to eliminate any situation of double taxation that might otherwise be faced by a Mainland or Hong Kong investor in the conduct of cross-border economic activities. In the lead up to the signing, differences in the interpretation of some of the provisions of the Comprehensive Arrangement were identified by both Sides during the course

of

negotiations.

However,

neither

the

Mainland

nor

Hong

Kong

had

any

desire to engage implementation of

in the

prolonged discussions that could hinder Comprehensive Arrangement. Hence, the

the early differences

were

put

aside

for

further

deliberation

in

the

post

implementation

stage.

Both

Sides

then

resumed

discussions

and

consensus

was

reached

on

the

interpretation and implementation of the outstanding issues. and Hong Kong exchanged letters (“the exchange letters”) and

The Mainland formally signed

the “Second Protocol to the Arrangement between the Mainland of the Hong Kong Special Administrative Region for the Avoidance Taxation and the Prevention of Fiscal Evasion with respect to

China and of Double Taxes on

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