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China: Tax treaty relief clarifications issued

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The Chinese State Administration of Taxation (SAT) has introduced two important new circulars to clarify the application of relief under China's double tax agreements (DTAs).

On February 6, the SAT issued Announcement [2018] No. 9 (Announcement 9) to refine the interpretation of the beneficial ownership requirement in the dividends, interest and royalties articles of Chinese DTAs. This has effect from April 2018.

This has been, for many years, a very challenging area in China taxation, starting with the issuance of SAT Circular [2009] No. 601 (Circular 601). Whereas the general international tax understanding of beneficial ownership focuses solely on a DTA relief claimant's degree of control over the income for which relief is sought (and the related assets), the Chinese approach has been to look at the commercial substance at the level of the DTA relief claimant (in addition to the control aspects).The evaluation is conducted with reference to a series of 'negative factors'. There have been calls by taxpayers for many years for the SAT to disentangle the commercial substance test from the control test, and deal with the former under anti-abuse rules. However, with Announcement 9, the SAT has now conclusively decided to stay with a commercial substance driven concept of beneficial ownership.

This being said, a number of aspects of the new guidance may help to improve access to DTA relief:

  • The SAT interpretative guidance accompanying Announcement 9 sets out numerous detailed examples which give a much better sense of what level of commercial substance the SAT considers acceptable for accessing relief. As one of the main issues with the existing beneficial ownership concept is the great diversity in local tax authority interpretations on the appropriate level of 'substance', these examples will be useful in justifying taxpayer positions before the local authorities. This being said, in particular for investment funds, the substance expectations in the guidance could be viewed as quite challenging to meet.

  • An earlier circular, SAT Announcement [2012] No. 30, had provided a 'safe harbour' under which listed foreign companies, and their local subsidiaries tax resident in the same jurisdiction, would not need to satisfy the 'negative factor' analysis to qualify as beneficial owners. Announcement 9 now extends this to companies, held by individuals and governments, and tax resident in the same jurisdiction.

  • There is now a type of 'derivative benefits' test, which can be given to the 100% direct and indirect parents of a DTA relief claimant company, in making the beneficial ownership assessment. If the parent company is either tax resident in the same jurisdiction as the DTA relief claimant, or in a jurisdiction whose DTA with China offers equivalent benefits, and it satisfies the 'negative factors' test, then DTA relief will be available to the DTA relief claimant. Multinational enterprises may find this of use (less so investment funds).

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 great diversity and inconsistency in the administrative procedures followed by local tax authorities. This is coupled with the increased challenges of obtaining tax residence certificates in some of the key holding company jurisdictions for China (e.g. Hong Kong and Singapore), which further complicate DTA access.

Separately, on February 9, the SAT issued Announcement [2018] No. 11 (Announcement 11), which supplements the earlier DTA guidance provided in SAT Circular [2010] No. 75 (Circular 75). Circular 75 is the most substantive piece of China DTA guidance and draws heavily on the commentary on the OECD Model Tax Convention. Minor clarifications are provided on the DTA transport and artist articles, but the most notable clarifications concern the treatment of foreign partnerships and the service PE timeframe calculation.

It is provided that, unless there are specific provisions in a given DTA dealing with partnership transparency, then foreign partnerships themselves must qualify for DTA benefits for any relief to be available. This means that the partnerships need to show that they have registered with foreign tax authorities as tax residents, and have paid tax as residents. One cannot just look through to the underlying partners and show that the partners paid tax, and then be able to claim DTA benefits on this basis.

At present, solely the China-France DTA has special provisions allowing for foreign partnership look-through. In practice, for other DTAs, taxpayers have, in the past, had case-by-case discussions with local tax authorities to agree foreign partnership look-through to access DTA relief. The new guidance would seem to close the door on this approach. Given that, in commercial practice (and particularly for investment funds), many partnerships are set up as flow-through entities, and the partnerships themselves are not registered as tax residents, this could create extensive China DTA relief complications. While China could, potentially, look to add new protocols to its DTAs to provide for look-through, this would not assist with the many Cayman and BVI partnerships, used for China investment, given the lack of relevant China DTAs.

More positively, it has been clarified that older China DTAs, whose service PE articles set a six-month (rather than 183-day) threshold, should be interpreted as including a 183-day requirement. This addresses the problem of aggressive local tax authorities asserting, for such DTAs, that foreign company staff presence in China for one day in a month constitutes presence for a full month. This is of assistance in relation to the US, Canada, Australia, Spain, Norway, Malaysia, and South Korea DTAs, among others.



Khoonming Ho

Lewis Lu

Khoonming Ho ( and Lewis Lu (

KPMG China

Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421


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