SHANGHAI – As a further sign of China’s growing economic cooperation with Europe, the leaders of China and Germany signed a double taxation agreement (DTA) on March 28, 2014. The agreement comes in the wake of, and shares strong similarity to, several important DTAs signed between China and other European countries in recent years. For example, a DTA between China and France signed on November 26, 2013 is estimated to go into effect on or after January 1, 2015.
China and Germany have shared a DTA since the mid-80’s. The revised version is the product of negotiations begun in 2007 and is due to go into effect 30 days following the completion of each country’s domestic ratification measures.
The primary changes introduced by the revised DTA include changes to the definition of tax residence for non-individual tax payers, where the former treaty’s “place of head office” has been revised to “place of incorporation and place of effective management.”
The concept of permanent establishment (PE) underwent several changes in the new agreement: the threshold for certain temporary sites (building, construction, assembly, or installation) to constitute a permanent establishment (PE) will be extended from 6 to 12 months; likewise, the threshold for a Service PE has been adjusted from 6 months within any 12-month period to 183 days within any 12-month period – intended to facilitate more accurate counting by the Chinese tax authorities.
Lastly, agency PEs are subject to new provisions restricting agents from claiming independent status when acting wholly on behalf of a single enterprise.
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Importantly, the revised agreement also halves the rate of withholding tax (from 10 to 5 percent) owed on dividends paid by German companies, provided they qualify as Chinese tax residents and directly hold 25 percent or more in the dividend-paying company. However, certain German investment vehicles, for example real estate investment, may be disqualified from the reduced rate.
The threshold for certain types of temporary sites (building, construction, assembly, or installation) to constitute a permanent establishment (PE) will also be extended from 6 to 12 months. Lastly, the new DTA specifically addresses the subject of treaty shopping, for which it stipulates penalties in the form of disqualification from its tax benefits.
The changes contained in the new China-Germany DTA are by and large consistent with the series of agreements signed in recent years between China and other European countries (e.g., France, Belgium, and the UK). Investors aiming to understand how these changes will affect their business would be advised to consult the strategies adopted by companies hailing from these regions for their operations in China following the activation of the respective DTA.
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An Introduction to Tax Treaties Throughout Asia
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