This is relevant mainly for (1) Hong Kong companies or investment funds selling securities in Chinese listed companies and (2) ship or aircraft leasing companies resident in Hong Kong who (finance) lease vessels and aircraft to lessees in mainland China.
On 1 April 2015, Hong Kong and mainland China signed the Fourth Protocol to the comprehensive double tax arrangement between mainland China and Hong Kong ("Arrangement"). A major change in the Fourth Protocol is that it gives Hong Kong tax residents (including "Hong Kong resident investment funds" as defined in the protocol) a tax exemption in China on gains derived from disposal of shares listed on a Chinese stock exchange provided certain conditions are met. Other amendments are (1) reducing the withholding tax rate for rentals from aircraft leasing and ship chartering from 7 percent to 5 percent; (2) introducing the main purpose test to dividends, interest, royalties and capital gains as an additional anti-treaty abuse requirement and (3) expanding the scope of information exchange under the Arrangement to cover information related to taxes other than income taxes in China, such as e.g., Value Added Tax, Business Tax or Real Property Tax.
The Fourth Protocol brings benefits as well as raises obligations to taxpayers. The exemption from Chinese income tax on capital gains and the reduced Chinese withholding tax rate for aircraft and shipping rentals should be welcome by taxpayers in Hong Kong. On the other hand, the strengthening of the anti-treaty abuse provisions and the expansion of the scope of information exchange under the Arrangement mean taxpayers who wish to enjoy the benefits under the Arrangement should not be seen as treaty shopping.
The Protocol must first be ratified by both sides before it can take effect. It is expected that the new provisions will take effect in the course of this year.