The Fifth Protocol of DTA between Mainland China and Hong Kong

On December 6, 2019, the Fifth Protocol of the Double Taxation Avoidance Arrangement between the Mainland China and Hong Kong (Fifth Protocol of DTA) entered into force.

The Fifth Protocol of DTA came into effect on 1 January 2020 in China and will come into effect from 1 April 2020 in Hong Kong SAR.

Where a Person (includes entity, trust, individual) other than an individual is a resident of both jurisdictions, the local tax authority on both sides (China State Taxation Administration and Hong Kong Inland Revenue Department) must come to mutual agreement on the place of residence, after considering: the place of effective management, the place of incorporation, and other relevant factors.

It also revises the definition of agency under the permanent establishment (PE) article to include the Persons who “habitually plays the principal role to conclude those contracts that are routinely concluded without material modification by the enterprise,” meaning Hong Kong staff who plays principal role to conclude contract in Mainland China may render the Hong Kong company subject to PE in China under the Protocol.

The Protocol also explicitly excluded a Person from being an independent agent where they act exclusively or almost exclusively on behalf of one or more enterprises to which that person is closely related (as defined under the Protocol).