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Understanding China’s double-tax agreements.

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Understanding China’s double-tax agreements

Navigating international taxation can be complex, especially when dealing with income earned across borders. China’s double-tax agreements (DTAs) are designed to prevent double taxation and promote economic cooperation with partner countries.

This article will break down the essentials of China’s DTAs, highlighting their significance and benefits for businesses and investors. Whether expanding into China or managing cross-border finances, understanding these agreements is crucial for optimising your tax strategy and ensuring compliance in China.

Overview of double tax agreements

A double tax agreement (DTA) is a bilateral agreement between countries that prevents companies from double taxation and fiscal evasion and fosters cooperation between international tax administrations.

Companies without a permanent establishment (non-tax resident enterprises) in China shall be subject to a WHT of 10% on gross income from dividends, interest, property lease, royalties, and other China-source passive income unless reduced under a double tax agreement.

Each tax treaty/agreement determines whether a lower WHT rate (or exemption) applies to non-TREs (individuals or companies).

To enjoy a tax exemption or reduction as stipulated by the DTA, an applicant must provide the relevant documents proving their tax residency and beneficial owner status, such as a tax resident certificate, business certificate, latest audit report, and shareholders’ decision.

China’s approach to double tax agreements and key provisions

China has signed over 100 agreements on the avoidance of Double Taxation (DTA), more than ten tax information exchange agreements (TIEA), the multilateral convention of mutual administrative assistance in tax matters, and a multilateral convention to implement tax treaty-related measures to prevent base erosion and profit shifting (the multilateral instrument). The DTA’s of China follow the Model Treaty Convention of the OECD.

A foreign company can be deemed to have a permanent establishment (PE) in China if:

  1. It has an establishment or a place of business in China (Fixed place PE)
  2. It has a building site, a construction, assembly, or installation project, or related supervisory activities that last for a certain period of time (Construction PE)
  3. It appoints an agent in China to conclude contracts or accept orders in China (Agent PE)
  4. It has employees working in China for a certain period of time (Service PE)

If a non-resident enterprise’s establishment or venue constitutes a PE in China, it will be subject to a 25% tax on all of its China-sourced income and non-China-sourced (worldwide) income that is deemed to have an actual connection to the PE.

Impact of China’s DTAs on international business

DTA is not a “China thing”. It is used worldwide to avoid double taxation and lower the tax burden. The benefit is obvious – you pay less taxes. Similar to international investors, Chinese companies can reduce their tax base on DTAs between China and other countries.

A simple example: a Belgian investor wants to repatriate funds in dividends. He checks the DTA between Belgium and China, which says:

“The lower rate of 5% applies where the beneficial owner of the dividend is a company (not a partnership) that directly owns at least 25% of the capital of the paying company within at least 12 consecutive months before the payment takes place.”

The Belgian company collect the required documents to prove its tax residency and enjoys the reduced WHT on dividends.

Practical tips for businesses

Apart from the permanent establishment (PE), the beneficial owner status has always been a critical factor for tax authorities. Beneficial owner refers to an individual, company, or any other group having the ownership and right of control over the income or the right or property derived from the income.

China’s State Taxation Administration adopted the “safe harbour rule,” which states that an applicant can be determined as a beneficial owner without conducting a comprehensive analysis and identifying major negative factors for beneficial owner assessment.

Safe harbour rules

  • Resident and listed company in the recipient jurisdiction
  • Government of the recipient jurisdiction
  • Individual who is a resident of the recipient’s jurisdiction
  • The applicant is a subsidiary that is 100% directly or indirectly owned by one or more persons covered by the safe harbour rule (In the case the subsidiary is indirectly owned by the persons covered by the safe harbour rule, the multi-tier holders should be either Chinese residents or residents of the recipient jurisdiction).

Major negative factors

  • The recipient is obliged to pay more than 50% of the income to a resident(s) of a third jurisdiction within 12 months after it receives the income.
  • The recipient’s business activities are in lack of substance
  • The recipient is exempt from tax on the relevant income, or the income is not taxable in its tax jurisdiction, or if the income is taxable, the effective tax rate is very low).

It should be noted that, even with the clarifications to the meaning of beneficial ownership, DTA relief remains challenging to access in China in light of the great diversity and inconsistency in the administrative procedures followed by local tax authorities.

Hence, it is still critical for investors to be well aware of the DTA framework and key tax compliance practices. Management should seek professional advice to plan their strategy around their business needs ahead of time to increase the chances of successful tax optimisation.

Conclusion

China’s double-tax agreements (DTAs) are pivotal for international businesses. They aim to curb double taxation and promote economic collaboration. These agreements enable reduced withholding taxes on income like dividends and royalties, which is crucial for attracting foreign investment.

However, navigating the nuances of DTAs—such as determining permanent establishment and beneficial ownership—is complex and varies administratively. Despite challenges, mastering China’s DTA framework is essential for optimising tax strategies and ensuring compliance. Strategic utilisation of DTAs enhances financial efficiency and strengthens competitive positioning in the global marketplace.

China’s double-tax treaty partners
AlbaniaHong KongPhilippines
AlgeriaHungaryPoland
AngolaIcelandPortugal
ArgentinaIndiaQatar
ArmeniaIndonesiaRomania
AustraliaIranRussia
AustriaIrelandSaudi Arabia
AzerbaijanIsraelSeychelles
BahrainItalySingapore
BangladeshJamaicaSlovakia
BardadosJapanSlovenia
BelarusKazakhstanSouth Afrika
BelgiumKenyaSpain
BruneiKoreaSri Lanka
BrazilKuwaitSudan
BotswanaKyrgyzstanSweden
BulgariaLaosSwitzerland
Bosnia-HerzegovinaLatviaSyria
CambodiaLithuaniaTaiwan
CanadaLuxembourgTajikistan
ChileMacedoniaThailand
CroatiaMacaoRepublic of the Congo
CubaMalaysiaTrinidad & Tobago
CyprusMaltaTunisia
Czech RepublicMauritiusTurkey
DenmarkMexicoTurkmenistan
EcuadorMoldovaUkraine
EgyptMongoliaUganda
EstoniaMoroccoUAE
EthiopiaNepalUK
FinlandNetherlandsUSA
FranceNew ZealandUzbekistan
GabonNigeriaVenezuala
GeorgiaNorwayVietnam
GermanyOmanZambia
GreecePakistanZimbabwe

Contact our teams for expert support and further information about accounting & tax requirements in China to ensure you are compliant in the market.

Christophe Marquis, Director, Shanghai, y.shi@acclime.com
Mei Qian, Accounting Services Director, q.mei@acclime.com
Emily Shi, Partner, y.shi@acclime.com


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