Will the profits of a Hong Kong enterprise generated in the Mainland be taxed under the Arrangement?
Under Article 1 of the Arrangement, a Hong Kong enterprise will only be taxed on its profits in Hong Kong unless it has business dealings through a permanent establishment in the Mainland. The enterprise will be taxed in the Mainland only on the profits attributable to its permanent establishment. If an enterprise holds its board meetings and key management activities in Hong Kong, it is likely that it will be regards as a Hong Kong "resident" enterprise. If the driving force of the enterprise is not in Hong Kong but in another country, it could take advantage of any double taxation treaty that may exist between the PRC and the country in which the company has its headquarters. A factory does fall into the scope of a "permanent establishment" but if the factory is merely used for storage, display or delivery of goods, purchasing goods, advertising, collecting information or other preparatory or ancillary activities, then it will not be regarded as a "permanent establishment" for double taxation purposes.
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