HONG KONG -- China's mainland and Hong Kong signed an agreement on Monday in a bid to avoid double taxation in mainland or Hong Kong, a move analysts say would sharpen the city' s competitiveness and encourage investment in the region.

The Arrangement for the Avoidance of Double Taxation on Income and Prevention of Fiscal Evasion extended the scope of the original agreement on business profits and income from personal services signed by the two sides in 1998.

The new pact ensures that the same income will not be doubly taxed in the two places with it covering direct income, such as operating profits and employment income, and indirect income, such as dividends, interest and royalties.

Director of State Administration of Taxation Xie Xuren signed the new arrangement on behalf of the central government while Chief Executive Donald Tsang, Financial Secretary Henry Tang and Secretary for Financial Services and the Treasury Frederick Ma signed on behalf of the Hong Kong Special Administrative Region government.

Tsang said the signing of the new pact would provide certainty and preferential tax treatment that enables businesses and individuals to better assess their investment positions and foster closer investment and trade links with the Chinese mainland.

The new pact, Tsang said, will provide added incentives for international investors to enter the vast market on the Chinese mainland through Hong Kong.

China's mainland had already approved the Mainland and Hong Kong Closer Economic Partnership Arrangement, or CEPA, three years ago to further open the mainland market to Hong Kong.

Tsang said the new arrangement would also help promote Hong Kong's economy, enhance its competitiveness and attract overseas capital by enhancing cross-border financing arrangements and the transfer of technical know-how and patent rights between the two places.

According to the new arrangement, top rates for withholding tax for dividends a Hong Kong resident receives from mainland investments will be cut from 20 percent to 10 percent while those rates for dividends a Hong Kong business receives will fall from 10 percent to 5 percent if the Hong Kong business holds at least 25 percent of the capital of the enterprise in the mainland.

Top rates for withholding tax for interest a Hong Kong resident receives from the mainland will release from 20 percent to 7 percent, and those for a Hong Kong business will dip from 10 percent to 7 percent.

Meanwhile, top rates for withholding tax for royalties a Hong Kong resident or business receives from the mainland will also slide to 7 percent.

The pact also introduces a tax-credit arrangement which will ensure that the same income will not be taxed twice.

However, it will take more extra time for both sides to ratify the new arrangement. In Hong Kong, Chief Executive Donald Tsang will have to make an order under the Inland Revenue Ordinance, subject to the Legislative Council's negative vetting.

If both parties ratify the pact before December 31, 2006, the new arrangement will come into effect with respect to Hong Kong taxes from the year of assessment beginning on or after April 1, 2007. With respect to taxes on China's mainland, it will apply to the taxable year beginning on or after January 1, 2007.