International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

China: New China-UK double tax agreement comes into effect

ho.jpg

lu.jpg

Khoonming Ho


Lewis Lu

The new People's Republic of China (PRC) – UK double tax agreement (DTA), replacing the 1984 PRC-UK DTA, entered into force on December 13 2013 and is effective from January 1 2014 for PRC tax purposes. The new DTA provides for lower levels of dividends and royalties withholding tax (WHT) as well as the exclusion of certain capital gains on minority shareholdings from capital gains tax. WHT rates for passive income under the new DTA are summarised below. For UK investors into the PRC, the main benefit of the new DTA is the dividend WHT reduction, from 10% to 5%, for direct holdings of 25%, and above, in a PRC company. The relief from tax on capital gains on disposals of holdings of less than 25% in PRC companies, other than land-rich companies, has also been welcomed. There has also been a minor reduction in WHT, on royalties from the use of, or right to use, industrial, commercial or scientific equipment, from 7% to 6% (see Table 1).

The clearer definitions of permanent establishment (PE) in the new DTA are also primarily of benefit to UK investors into the PRC. The threshold period for a construction PE has been extended from six to 12 months. In addition, the 1984 DTA provision permitting WHT to be imposed on technical fee payments has been abolished while a service PE provision has been introduced, which applies where the provision of services is for a period of more than 183 days in a 12 month period. The abolition of the technical fee payments article alongside the introduction of the service PE provision may be viewed as providing a degree of protection for service activities undertaken by UK enterprises in the PRC to the extent that the PE threshold is not breached.

Clarifications have also been made providing the deduction of executive and general administrative expenses in calculating PE profits and permitting an approach to PE profit calculation based on an allocated portion of total enterprise profits.

The final entry into force of the new PRC-UK DTA is very welcome. It is expected that some restructuring of investment arrangements, from the UK into China, may follow from the increased tax efficiency of direct investments resulting from the new DTA provisions, and there will be greater advantages going forward in using UK holding companies for China-EU investment flows.

Table 1


China domestic

UK domestic

DTA rate

Dividends

10%

0%

5/10/15%

Interest

10%

20%

10%

Royalties

10%

20%

6/10%

Capital gains

10%

0%

0/10%

Khoonming Ho (khoonming.ho@kpmg.com)

KPMG, China and Hong Kong SAR

Tel: +86 (10) 8508 7082

Lewis Lu (lewis.lu@kpmg.com)

KPMG, Central China

Tel: +86 (21) 2212 3421

more across site & bottom lb ros

More from across our site

ITR’s latest quarterly PDF is going live today, leading on the EU’s BEFIT initiative and wider tax reforms in the bloc.
COVID-19 and an overworked HMRC may have created the ‘perfect storm’ for reduced prosecutions, according to tax professionals.
Participants in the consultation on the UN secretary-general’s report into international tax cooperation are divided – some believe UN-led structures are the way forward, while others want to improve existing ones. Ralph Cunningham reports.
The German government unveils plans to implement pillar two, while EY is reportedly still divided over ‘Project Everest’.
With the M&A market booming, ITR has partnered with correspondents from firms around the globe to provide a guide to the deal structures being employed and tax authorities' responses.
Xing Hu, partner at Hui Ye Law Firm in Shanghai, looks at the implications of the US Uyghur Forced Labor Protection Act for TP comparability analysis of China.
Karl Berlin talks to Josh White about meeting the Fair Tax standard, the changing burden of country-by-country reporting, and how windfall taxes may hit renewable energy.
Sandy Markwick, head of the Tax Director Network (TDN) at Winmark, looks at the challenges of global mobility for tax management.
Taxpayers should look beyond the headline criteria of the simplification regime to ensure that their arrangements meet the arm’s-length standard, say Alejandro Ces and Mark Seddon of the EY New Zealand transfer pricing team.
In a recent webinar hosted by law firms Greenberg Traurig and Clayton Utz, officials at the IRS and ATO outlined their visions for 2023.