China: The new China-Switzerland double taxation agreement

December 01 2013


Khoonming Ho		Lewis Lu

Following the signing of a landmark free trade agreement in July 2013, China and Switzerland have signed a revised double taxation agreement and protocol (new DTA) on September 25 2013. The earliest possible effective date of the New DTA would be January 1 2014, although January 1 2015 would likely be the more realistic time frame subject to the timetable from ratification in the two countries. The new DTA introduces more favourable withholding tax treatment on dividends and royalty income. By way of comparison, the principal features of the New DTA are shown in Table 1.

Regarding capital gains, it is important to note that the new DTA limits the scope of capital gains tax exemption relief applicable on share disposals. The blanket relief on Chinese tax on gains on disposal of shares in a non-land rich Chinese tax resident enterprise (TRE) is no longer available under the new DTA. Instead, under the new DTA, China will have a right to impose a 10% tax on gains derived by a Swiss investor from the disposal of shares in a Chinese TRE if:

The Chinese TRE is a considered land-rich (that is more than 50% of the value of the company is derived directly or indirectly from immovable property situated in China); or
The Swiss investor, at any time during the twelve-month period preceding the disposal, had held directly or indirectly of at least 25% of the capital of the Chinese TRE.

In addition to the above, the new DTA expands the threshold period of a construction permanent establishment from six months to 12 months while the threshold period for a service PE has been revised to 183 days to align with other new DTAs recently concluded or re-negotiated by China.

Investors from China and Switzerland should evaluate the impact of the new DTA on their existing investment holding structure to assess whether the intended tax effectiveness would be sustainable going forward, and take into consideration the same when structuring future investments in both countries.

Table 1
	Existing DTA	New DTA
Dividends	10% in all cases	5% if the beneficial owner of the dividends is a company which directly holds at least 25% of the capital of the company paying the dividends; 10% in all other cases Exemption specifically granted to institution or fund wholly owned by that State: in the case of China, the China Investment Corporation (CIC) and the National Council for Social Security Fund Specific limitation of benefit clause introduced (note 1)
Royalties (on licenses and rental of industrial/commercial/scientific equipment.)	10%	9% Specific limitation of benefit clause introduced (note 1)
Note 1: The specific limitation of benefit clause is introduced to deny the beneficial tax treatment accorded under the New DTA, where the main purpose of the income recipient is to take advantage of the reduced withholding tax rate or a tax relief on capital gains derived.