5 for legal persons and 10 for individuals

If Hong Kong is no longer the single hub of trade between China and the rest of the world, it nevertheless remains a base preferred by Western and Asian investors, for their approach to mainland China. And this territory multiplies the initiatives to strengthen its positioning to its neighbour, third country recipient of foreign investment in the world. Thus, after trade agreements Cepa ("close economic partnership agreement") or regional cooperation organized around the delta of the River pearls, the People's Republic of China and the Hong Kong Special administrative region signed on 21 August 2006, a new tax treaty, replacing the 1998 Agreement. This text will enter into application on 1 January 2007, in China and April 1, 2007 in Hong Kong (subject to the completion of the procedures of ratification before the end of the year). The purpose of this "complete agreement" is to make Hong Kong a basis of investments to China more attractive that it is (already) today by declaring a reduced rate of taxation for the benefit of the companies or individuals resident in Hong Kong, on the income derived from investments made in China.

Taking and completing the principle avoiding double taxation implemented in 1998, the agreement allows physical and moral Hong Kong persons considered "foreigners" in China, notwithstanding the return of Hong Kong in the people's Republic in 1997, to benefit from rates among the lowest that China is committed to practice by such bilateral agreements. Thus, the deduction at source would apply to charges stemming from agreements relating to intellectual property or technology transfer, and interest on debt, cannot be greater than 7 of the gross amounts so paid.

In addition, dividends received by an investor from Hong Kong into a Chinese entity which he would have at least 25 of the capital (traditionally minimum participation for the Chinese regime of the "joint ventures") will be a deduction at source in China, 5 for legal persons and 10 for individuals, thus dividing by two rates normally applicable. Even if foreign investors currently enjoy an exceptional exemption from withholding on the repatriation of dividends, this convention gives a competitive edge to the investors in Hong Kong, for possible deletion of the said exemption.

Information exchange

One of the provisions that may ultimately prove to be the most interesting is the full exemption on capital gains from disposal of securities of a Chinese entity held by an investor from Hong Kong, then however sold shares represent less than 25 of the securities of the company Chinese and that the operation is not in real estate the application of this exemption will be later defined not a regulations of the Chinese tax authorities.

Finally, this agreement is a mechanism for the exchange of information between tax administrations Chinese and Hong Kong conforming to the model of tax of the OECD version 1995 convention, more restrictive version, however that the 2005 model usually adopted for this type of agreement. Thus, Chinese and Hong Kong Governments are not obliged to provide information that may be obtained by application of local law and that might reveal trade secrets, commercial or professional.

All of these new provisions will necessarily strengthen the attractiveness of Hong Kong as place of investment, but perhaps especially as the basis for investment to mainland China. This convention and the implementing legislation that will follow will be very studied to optimize the holdings in Hong Kong and holders of equity investments in China, to fund more generally foreign investments in China and for the enhancement of intellectual property rights between China and the rest of the world.

The France and Hong Kong now have a reason to bring the negotiations to allow the signing of a tax treaty between the two territories and thus complete the legal and fiscal environment for the benefit of French entrepreneurs in China and Hong Kong.