China and UK Sign New Tax Agreement
Jul. 15 – The governments of the People’s Republic of China and the United Kingdom renewed their agreement for the avoidance of double taxation (new DTA) on June 27, updating the definition of a permanent establishment (PE) and revising withholding tax rates on dividends and royalties.
The new agreement stipulates that a building site, construction, assembly or installation project, or supervisory activities in connection therewith, will be counted as a PE when it continues for a period of more than 12 months, against the six-month period under the current DTA. However, investors should note that the time-frame of 12 months also includes connected “supervisory activities.”
The PE definition also introduced the concept of a service PE, as the new DTA describes in Article Five (3b):
“The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 183 days in any twelve-month period commencing or ending in the fiscal year concerned.”
A comment by the tax consultancy Deloitte says the expansion of the PE definition means both Chinese and U.K. enterprises will need to assess the risk of creating a taxable presence in the other state if they provide services for an aggregate period of more than 183 days over a 12-month period.
The new DTA also reduces the withholding tax on dividends paid out by Chinese companies to 5 percent from 10 percent, if the dividend receivers hold at least 25 percent of shares in the Chinese company. The withholding tax rate remains at 10 percent in most other cases.
The new provisions will not impact the dividends paid from the United Kingdom to China since the Chinese already enjoy withholding tax exemption from dividends in the United Kingdom, but they will likely attract more direct investment to China from U.K. companies.
Changes are also made to tax rates on royalties for the use of, or the right to use, industrial, commercial or scientific equipment, from the existing 7 percent to 6 percent.
Additionally, the two governments have updated the article on capital gains tax (CGT). Article 13 clarifies that the alienation of property will be taxable only in the state of which the alienator is resident, except in certain situations, including:
- Gains derived from the alienation of immovable property in China by a U.K. resident (or vice versa)
- Gains derived by a U.K. resident from the alienation of shares deriving more than 50 percent of their value from immovable property in China (or vice versa)
- Gains derived by a U.K. resident from the alienation of shares in a company resident in China if, at any time during the 12-month period preceding the alienation, the U.K. resident owned at least 25 percent of the shares in the China resident company
Kevin Phillips, an international tax partner of Baker Tilly, believes the new provisions on CGT will not change the practical reality too much, but make it clearer when CGT can be charged.
It is also noticeable that the existing Article of “Technical Fees” is cancelled in the new DTA. The Deloitte comment believes that, under the new legal framework, technical fees will be covered in part by the Royalties article and, if not considered to be business profit, in part by the Other Income article. The Other Income article is newly added and broadly sets out the concept that any income not mentioned in the other articles of the new DTAs should be taxable only in the state where the beneficial owner is resident.
The new DTA has also revised a number of other articles, including the Shipping and Air Transport article (Article Eight), the Associated Enterprises article (Article Nine), the Students article (Article 20), the Elimination of Double Taxation article (Article 22) and the Exchange of Information article (Article 26).
It is hoped the signing of the new DTA will be welcomed by U.K. businesses since it will likely make the United Kingdom another attractive alternative when foreign investors choose holding jurisdictions for their China investments.
Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China, Hong Kong, Vietnam and India. Foreign investors in China who find they are pertinent candidates for DTA status and who wish to know what tax reductions may be applicable to them under the terms of their specific DTA may contact the firm at email@example.com for further assistance.