On 19 July, Mainland China and Hong Kong signed the Fifth Protocol to their Comprehensive Avoidance of Double Taxation Arrangement (CDTA). If the ratification procedures can be completed by the end of this calendar year, the amendments will be effective:

a)  In Hong Kong: for any year of assessment beginning on or after 1 April 2020;

b)  In Mainland China: for any tax period beginning on or after 1 January 2020.


Newly added article on teachers and researchers

Promoting exchanges of talents, training and co-operation among the cities within the Greater Bay Area (GBA) initiative region is considered key to further driving its development.

With this objective in mind, the new article on teachers and researchers is added to the CDTA. This is Hong Kong’s second CDTA containing such an article (the other being with Saudi Arabia).

Under this new article, a qualified teacher or researcher, who is employed in Hong Kong or Mainland China and engages in teaching and research activities at a recognized educational and research institution in the other jurisdiction, shall be exempt from taxation by that jurisdiction for a period of three years, provided that the relevant income has been subject to tax where the person concerned is employed.

To qualify for the tax exemption under the new article, a teacher or researcher must be, or immediately before taking their cross-border assignment, a resident person of the other jurisdiction. This tax exemption is not subject to the normal condition that their presence in the jurisdiction where they are employed must be not more than 183 days within any 12-month period.

To avoid double non-taxation, one of the tax exemption conditions specified in the new article is that “the relevant income has been subject to tax on the side where the person concerned is employed”. Given this, to facilitate a qualified teacher or researcher from Hong Kong to qualify for the tax exemption in Mainland China, new provisions have earlier been added to sections 8(1A)(b) and 8(1AB) of the Inland Revenue Ordinance. The provisions ensure that they will not be exempt from tax in Hong Kong even though during a year of assessment concerned, they render their services wholly outside Hong Kong.

Introducing provisions to prevent tax treaty abuse in accordance with the latest international standards

Emphasizing the CDTA is not intended to create opportunities for non-taxation or reduced taxation

The Fifth Protocol replaces the original preamble of the CDTA with a version that aligns with the language recommended under the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting Action 6 Final Report (preventing treaty abuse).

The revised preamble explicitly states that the intention of the CDTA is also not to create opportunities for non-taxation or reduced taxation through tax evasion or avoidance. Specifically, it is intended to deny treaty-shopping arrangements aimed at obtaining reliefs provided in the CDTA for the indirect benefit of residents of a third state.

Dual residence of a non-individual entity to be resolved by mutual agreement

Under the Resident Article (Article 4) of the existing CDTA, the dual residence of an entity other than an individual (e.g. companies and partnerships) (i.e. a legal entity) is addressed by a tie-breaker rule that deems the entity to be a resident of the jurisdiction in which its place of effective management is situated.

The Fifth Protocol replaces this with a mutual agreement approach. If a legal entity is a dual resident of both territories the authorities shall endeavor to determine, by mutual agreement, the place of residence of the legal entity. The determination shall consider the place of effective management of the entity, the place where the entity was incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, an entity shall not be entitled to any relief or exemption from tax provided by the CDTA except that agreed by the authorities of the two territories.

Lower dependent agency permanent establishment threshold

Currently, paragraph 5 of the Permanent Establishment Article (Article 5) of the CDTA provides that where a dependent agent of an enterprise of one jurisdiction habitually acts on the enterprise’s behalf and has, and habitually exercises, an authority to conclude contracts in the name of the enterprise in the other jurisdiction, that enterprise will be deemed to have a dependent agent permanent establishment (DAPE) there.

The Fifth Protocol adds a provision for a dependent agent who “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise” to constitute a DAPE. The existence of a DAPE from one jurisdiction in the other would thereby create tax liabilities.

In this context, the Fifth Protocol also explicitly states that contracts can be in respect of (i) the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or (ii) the provision of services by that enterprise.

Furthermore, the Fifth Protocol also broadens the circumstances under which an agent will be considered as a dependent agent, thereby constituting a DAPE. Currently, it is only where the activities of an agent are “wholly or almost wholly performed on behalf of an enterprise of a contracting party” will such an agent be considered as a dependent agent. Under the Fifth Protocol, an agent acting “exclusively or almost exclusively on behalf of one or more enterprises to which the agent is closely related”, will be considered as a dependent agent.

The term “closely related” is defined as follows: “based on all the relevant facts and circumstances, one [party] has control of the other or both are under the control of the same persons or enterprises.”

Disposal of shares or comparable interests in a land-rich entity

Unlike Hong Kong, capital gains are taxable in Mainland China. As such, a resident of Hong Kong who disposes of shares in a “land-rich” Mainland China company is liable to tax and will not be exempt from this tax under the existing CDTA.

The Fifth Protocol now explicitly states that the taxing rights of Mainland China in this regard will not be confined to shares in a company, but will also include comparable interests in other entities such as partnerships and trusts.

Nonetheless, the definition of a “land-rich” entity is slightly relaxed under the Fifth Protocol from “50 percent or more” of the underlying assets of an entity being immovable property situated in Mainland China, to “more than 50 percent”.

Introduction of principal purpose test to deny entitlement to tax benefits otherwise obtained

The current specific provision for anti-treaty abuse, “the main purpose” test, only covers dividends, interest, royalties and capital gains. This test denies tax benefits available under the CDTA when the main purpose of an arrangement or transaction is to obtain a tax benefit.

The Fifth Protocol replaces the specific provision of “the main purpose” test with a general provision for anti-treaty abuse, i.e. a principle purpose test (PPT) that applies to all the articles of the CDTA. Tax benefits otherwise granted under the CDTA will be denied where it is reasonable to conclude that one of the principal purposes of an arrangement or transaction is to secure such a benefit.


The new article on teachers and researchers should help the GBA initiative by facilitating exchanges of talents, training and co-operation by providing tax relief and certainty.

With the lower DAPE threshold under the Fifth Protocol, Hong Kong resident enterprises that rely on persons in Mainland China to undertake certain activities before they enter into business contracts inside or outside Mainland China, may need to reassess their situations. The activities of those persons may exceed the lower DAPE threshold and thus expose them to taxation in Mainland China.

Conceivably, the general anti-abuse provision of the PPT would be more difficult to satisfy than the previous specific provision of “the main purpose” test. As such, taxpayers who have engaged, or plan to, in any tax arrangements involving the CDTA should review their situations to ascertain whether they will satisfy the new, more onerous, PPT.

At this stage, it is not clear what the practical impact of the resolution of the dual residence of a legal entity by way of the more subjective process of mutual agreement will be.

Currently, a Hong Kong taxpayer who seeks to obtain a tax benefit in Mainland China under the CDTA will normally be required to produce a Certificate of Residence (CoR) issued by the Inland Revenue Department (IRD). The CoR confirms that they are a resident of Hong Kong, and failure to obtain a CoR would generally mean that such a taxpayer would be unable to obtain a tax benefit under the CDTA.

The IRD’s current processing of a CoR applications also involves an element of subjectivity. In addition to examining whether an applicant satisfies the definition of a Hong Kong resident, the IRD would also take into consideration whether, the applicant is abusing the terms of the CDTA and, if so, would refuse to issue a CoR.

It remains unclear how the other anti-abuse provisions introduced would add to the current subjectivity of the process. Where necessary, taxpayers should seek professional tax advice.

Tracy Ho is Asia-Pacific Business Tax Services Leader at EY. Patrick Kwong is Executive Director, and Kathy Kun is Senior Manager, of EY Tax Services

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