By Ines Liu
Hong Kong entered into a Double Taxation Arrangement (DTA) with China in 2006. The treaty acts as a way to avoid double taxation and clamp down on tax evasion, improving ties between both jurisdictions by reinforcing their respective tax laws, encouraging competition, and promoting investment. A fourth protocol was signed on April 1, 2015, amending four key aspects of the DTA. One of those aspects was tax exemption for capital gains derived by foreign investors that sell shares of a China based company, which we explore in detail below.
A global high profile venture capital holding company has a subsidiary incorporated in Hong Kong (Company A). Company A holds an aggregate of shares (above 25 million) of a China listed company (Company B). After a 12-month restricted stock trade period, Company A looks to sell shares of Company B, but wants to know how to meet the requirements for capital gains tax exemption under the tax treaty.
Overall, withholding tax applies to capital gains derived from transferring Company B’s shares. However, the DTA states that:
- “Income or gains derived by a resident of a Contracting Party from the alienation of shares or comparable interests in a company, the assets [Asset value] of which consist wholly or principally [No less than 50 percent] of real property in the other Contracting Party, may be taxed in that other Party.”