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Memorandum between mainland China and Hong Kong
In August 2006, a new tax memorandum between the PRC Central Government and the Hong Kong Special Administrative Region Government was signed to replace the previous 1998 memorandum.
The new tax memo will be effective in 2007, subject to the fulfillment of legal procedures by both parties.
The main changes consist of the establishment of favorable withholding tax rates for payments from mainland China to Hong Kong:
Interest Royalty Dividend 
China Domestic Rate 10% 10% 0% (FIE) 20% (domestic)
Memo Rate 0% (Government)  7% 5% (FIE) 10% (domestic)
 FIE = foreign invested enterprises, with at least 25% foreign equity. Domestic = non-FIE
 The 7% withholding tax rate applies to interest payable from the mainland; the 0% rate applies to interest received by the Hong Kong Government or a recognized institution.
(There is no tax on gains from the sale of capital assets in Hong Kong).
Accordingly, Hong Kong becomes a better choice for holding mainland investments. In fact, it will be tax efficient to use a Hong Kong company:
- as a window company for holding investments on the mainland;
- to provide loans to mainland entities; and/or
- to license intellectual property to mainland entities.