On July 4, 2011, the Hong Kong Inland Revenue Department (“IRD”) issued a press release announcing that it has received a reply (the “Reply”) from the PRC State Administration of Taxation (“SAT”) to IRD’s question on PRC withholding tax in relation to dividends distributed by PRC companies listed in Hong Kong (“H Share Companies”) to Hong Kong and other overseas individual investors.
Before the PRC Tax Circular No. 45 (“Circular 45”) was repealed by the SAT on January 4, 2011, overseas individuals were exempted from paying PRC individual income tax (“IIT”) on the dividends distributed by non-foreign invested enterprises listed in Hong Kong even though such dividend income should strictly be considered income sourced from the PRC and be subject to IIT. After the repeal of Circular 45, some H Share Companies began withholding 20 per cent of IIT when distributing dividends for the 2010 financial year by following the standard PRC domestic IIT rate. It was therefore a welcome development when SAT, on June 28, 2011, issued the Notice on the Issues Concerning the Collection and Administration of Individual Income Tax Following the Repeal of Circular 45. SAT further clarified their position on the payment of IIT by overseas individuals with respect to dividends distributed by H Share Companies in the Reply. We summarize the current position as follows:
- Hong Kong residents will generally be subject to a dividend withholding tax of 10 per cent pursuant to the arrangement for the avoidance of double taxation signed between PRC and Hong Kong; and
- Tax residents of other countries which have entered into a double taxation agreement with PRC with an applicable treaty rate which is above or below 10 per cent will be subject to the treaty rate in the relevant tax treaty.
It should be noted that overseas individual shareholders who receive dividends from foreign invested enterprises listed in Hong Kong continue to be exempt from IIT under PRC Tax Circular 20.
The recent development on IIT is consistent with the trend of Chinese fiscal reform by gradually removing preferential tax treatment to foreign investors and treat both domestic and foreign investors on an equal footing.