22 February 2001 External T.I. 1999-0014605 - Hong Kong

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether Hong Kong is considered part of China for purposes of paragraph 95(2)(a.1)

Position: Yes

Reasons: As a result of the unification of Hong Kong and the People's Republic of China, there is no reason, for purposes of paragraph 95(2)(a.1), to distinguish the two.

XXXXXXXXXX 	1999-001460
		Tim Kuss
February 22, 2001

Dear XXXXXXXXXX:

Re: Paragraph 95(2)(a.1)
Technical Interpretation

This is in reply to your letter requesting whether Hong Kong is considered to be part of China for purposes of paragraph 95(2)(a.1) of the Income Tax Act.

Technical Interpretation

Pursuant to subparagraph 95(2)(a.1)(ii), paragraph 95(2)(a.1) will not apply where the property was manufactured, produced, grown, extracted or processed in the country under whose laws the affiliate was formed or continued and exists and is governed and in which the affiliate's business is principally carried on.

In our view, as a result of the unification of Hong Kong and the People's Republic of China, Hong Kong would be considered part of China for purposes of paragraph 95(2)(a.1).

We would point out that this is a different issue than whether Hong Kong is covered by the Canada-China Income Tax Convention (the "Convention") and thereby considered to be part of a "designated treaty country" for purposes of determining "exempt earnings" under our foreign affiliate rules.

Notwithstanding the unification of Hong Kong and the People's Republic of China, Hong Kong has maintained its own tax system. Paragraph 1 of Article 3 (General Definitions) of the Convention defines the term "the People's Republic of China" to mean (for purposes of the Convention) "all of the territory of the People's Republic of China ... in which the laws relating to Chinese tax apply ...." The term "Chinese tax" is defined in paragraph 1 of Article 2 (Taxes Covered) of the Convention and does not include taxes imposed under Hong Kong's tax regime. As a result, it is our opinion that a corporation that is resident in Hong Kong and subject to Hong Kong's tax regime (rather than China's tax regime) would not be considered a resident of China under the Convention and would fail the test in paragraph 5907(11.2)(a) of the Income Tax Regulations for purposes of determining exempt earnings under our foreign affiliate rules.

We hope our comments are of assistance.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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