 New UK-China tax treaty
A new income tax treaty between the UK and the People’s Republic of China (PRC) was signed on 27 June 2011. The treaty will come into effect from the start of the tax year following ratification, possibly by the end of 2011, so could take effect from 1 January 2012 in the PRC and 1(6) April 2012 in the UK.
The treaty generally follows the OECD Model Convention, although there are some differences which are described below. The maximum rates of withholding tax detailed in the treaty are as follows:
Dividends
- 5% if the beneficial owner is a company holding directly or indirectly at least 25% of the capital of the paying company
- 15% if the dividends are paid out of income or gains derived from immovable property by a tax exempt investment vehicle which has obligation to distribute most of its income or gains annually, and
- 10% in all other cases.
Interest
- 10%, with exemption of interest paid to or on loans financed, guaranteed or insured by the government.
Royalties
- 10% on 60% of the gross amount of royalty paid for the use of, or the right to use, industrial, commercial, or scientific equipment, and
- 10% on the total gross amount in all other cases.
Permanent establishments
Under the treaty, an installation or structure used for the exploration or exploitation of natural resources would constitute a permanent establishment (PE). In addition, the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged for such purpose would constitute a PE if activities of that nature continue for a period or periods aggregating more than 183 days within any 12-month period.
In determining the profits of a PE, expenses incurred for the purposes of the PE, including executive and general administrative expenses so incurred, will be allowed whether in the state in which the PE is situated or elsewhere.
No profits need be attributed to a PE by reason of the mere purchase by the PE of goods or merchandise for the enterprise. The profits to be attributed to the PE shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
Anti-abuse provisions
Articles 10, 11 and 12 (dividends, interest and royalties) each contain an anti-abuse provision. This is worded to the effect that the article in question will not apply if it was the main, or one of the main purposes of any person concerned with the creation or assignment of shares, debt-claims or rights under which the payments are made to take advantage of the article by means of that creation of assignment.
Capital Gains
Gains derived by a resident of a contracting state from the alienation of shares in a company which is a resident of the other contracting state may be taxed in that other contracting state if the first-mentioned resident, at any time during 12 months preceding such alienation, owned directly or indirectly, at least 25% of the shares of that company.
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