Jun. 19 – China and the Netherlands signed a new “Tax Treaty for the Avoidance of Double Taxation and Prevention of Fiscal Evasion” on May 31, 2013, which will replace the current double tax treaty of 1987.
However, the new treaty still needs to be ratified according to the legislation of both countries, and will enter into force on the last day of the month following the date of the last notification. Once in effect, the treaty will apply to income derived on or after January 1 of the following year.
The new treaty is one of the most favorable bilateral tax treaties that China has concluded, and it is expected to exert significant influence over investments into both countries. Key features of the new treaty can be found below.
Under the new treaty, an enterprise operating through service provision (including consultancy services) in any one of the two contracting countries will be considered as a permanent establishment if it has engaged in continuous activities for a period (or periods) amounting to more than 183 days within any 12 month period.
Moreover, the new treaty extends the test for whether a building site, construction, assembly or installation project (as well as supervisory activities in connection therewith) constitutes a permanent establishment from 6 months to 12 months.
The new treaty limits the tax rate in respect of dividends in all cases to 10 percent, provided the recipient of such dividends is the beneficial owner of the dividends. However, such rates may be reduced to 5 percent if the beneficial owner is a company (other than a partnership) which directly holds at least 25 percent of the capital of the company paying the dividends. As such, the Netherlands is now privilege to one of the lowest rates approved by China in its tax treaties.
Moreover, if the beneficial owner of the dividends is the Government of the other Contracting State, any of its institutions, or any other entity (the capital of which is directly or indirectly wholly owned by the other Contracting State), the above-mentioned rate may even be reduced to nil.
Under the current tax treaty, China is allowed to tax royalties at a rate of 10 percent on all royalties (the Netherlands does not levy withholding tax on royalties under its domestic tax law). The new treaty reduces the Chinese royalty withholding tax rate to 6 percent for payments of any kind received as a consideration for the use of, or the right to use, industrial, commercial or scientific equipment.
According to the new tax treaty, the capital gains of a Dutch entity from the disposal of Chinese shares are no longer taxable in China under all occasions, except for the following two circumstances:
- The shares derive more than 50 percent of their value directly or indirectly from immovable property situated in China.
- The recipient of the gains, at any time during the 12 month period preceding the share disposal, holds a participation, directly or indirectly, of at least 25 percent in the capital of the Chinese resident company.
This principle shall be applied vice versa between the two countries.
The new treaty denies the benefits of the treaty with respect to withholding taxes on dividends, royalties and interest, if the main purpose of the creation or assignment of the rights is to take advantage of the treaty.
In addition, the new tax treaty has provided for a mutual agreement procedure between the states. Such procedures can be initiated at the request of any taxpayer who believes that the actions of one or both the contracting states results, or will result, in taxation not in accordance with the treaty.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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