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



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













Capital gains




Khoonming Ho (

KPMG, China and Hong Kong SAR

Tel: +86 (10) 8508 7082

Lewis Lu (

KPMG, Central China

Tel: +86 (21) 2212 3421

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