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Khoonming Ho |
Lewis Lu |
A new China-France double tax agreement (DTA), set to replace the 1984 China-France DTA and its associated protocol of the same year, was signed on November 26 2013 alongside a new protocol. Assuming the remaining approval procedures are completed in the course of 2014, the new DTA could take effect from as early as January 1 2015. The old DTA provides no incremental benefit for a French company driving dividends from China. The new DTA goes further providing that a 5% rate will apply to a French company where direct shareholdings of 25% and above are held in a Chinese company.
The change to the capital gains article, clarifying that taxing rights on gains not dealt with elsewhere in the article are reserved to the residence country, helps to settle a long-running ambiguity as to whether gains on disposals of Chinese shareholdings of less than 25% would be exempt from Chinese withholding tax (WHT) under the China-France DTA. Further, the protocol provides that 0% WHT will apply to dividends, interest and capital gains, other than those in relation to immovable properties, derived by qualified, listed sovereign wealth funds (SWF).
Another salient point is the detailed provision concerning the application of the DTA in situations involving partnerships. Where China sourced income arises to a French partnership, then DTA benefits may be granted to the French partnership, if it is a taxable person under the French tax law, or granted to the French partners, if they are instead treated as the taxable persons under the French tax law. In other words, the characterisation of the French partnership by France controls in this case. In contrast, where China sourced income arises to a Chinese partnership with French partners, DTA benefits may be denied if either France or China views the Chinese partnership as non-transparent.
The new DTA also provides clearer definitions of permanent establishment (PE) and the PE profit attribution methodology, which should be of particular benefit to French investors into China. Construction and installation projects, which are now expanded to include associated supervisory services, now only constitute a PE if they continue for more than 12 months, as against six months in the old DTA. In addition, the shift from the six months test to the 183 days for the service PE is positive for French investors.
Specific anti-avoidance limitation on benefits (LOB) clauses, which exclude the application of DTA benefits where the main purpose or one of the main purposes of an arrangement is to take advantage of the terms of the DTA, have been included in each of the dividend, interest, royalties and other income articles. This means that the Chinese general anti-avoidance rule (GAAR) may be applied where appropriate.
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
