The State Administration of Tax (”SAT”), has released Tax Circular No. 37 and the Interpretation of double agreement on taxation between China and Germany (“DTT”) on 16 June 2016. Tax circular 37 informs the new DTT will be in effect from 1 January 2017 onwards as the new tax agreement is approved by both governments.
Key points of interpretation for the DTT and Tax Circular
Application of income and its execution
Tax Circular 37 regulates that the new DTT will be in force beginning at 1 January 2017 and will be applicable to the income generated from 1 January 2017.
Criterion of resident enterprises
The new DTT is adopted for two criterions (“place of incorporation” and “place of effective management”) for resident enterprises to replace the “place of head office” in the old DTT. Terms of permanent establishments (“PE”)
Constructional PE: The new DTT expands the “lasting-time” standard of Constructional PE from 6 to 12 months.
Servicing PE: The new DTT modifies the original lasting-time standard from ”accumulative more than 6 months within any 12 months” to “accumulative more than 183 days within any 12 months ”, avoiding the threshold of “a remaining 1 day equals to one month”.
Agency PE: The new DTT article 5(6) emphasis that, ”when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, and conditions are made or imposed between that enterprise and the agent in their commercial and financial relations which differ from those which would have been made between independent enterprises, he will not be considered an agent of an independent status within the meaning of this paragraph.” It continues to use the standard “how to distinguish the dependent or independent agent”. This indicates that SAT is focusing on the agent permanent establishment from time to time.
International Transport The new DTT adds the paragraph 2 in article 8, emphasizing that profits from the rental on a bare-boat basis of ships or aircraft, and profits from the use, maintenance or rental of containers (including trailers and related equipment used for the transport of the containers) used for the transport of goods or merchandise also should be included in the international transport profits, the country of enterprise administration organization monopolizes the right of taxation. The pre-condition is that such “rental, use and maintenance” must be “depending” on “international transport activities”. But as to the standard “depending”, the DTT doesn’t make specific procedures (generally, profits from such activities shall not exceed 10% of total revenue).
Associated enterprises The new DTT adds the new contents of “Special adjustments to tax payments”, where a Contracting State includes in the profits of an enterprise of that State – and taxes accordingly – profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. It indicates the objective and fair stance that while the Chinese tax authority crack down cross-border tax avoidance firmly, avoiding to bring double taxation to the tax payer.
Income from investment
Dividends. The new DTT reduces the dividend’s withholding tax rate from 10% to 5% if the beneficial owner is a company (other than a partnership) which holds directly at least 25% of the capital of the company.
In addition, compared with other DTT signed with other countries, the new DTT adds a paragraph purposely, “15% of the gross amount of the dividends where those dividends are paid out of income or gains derived directly or indirectly from immovable property within the meaning of Article 6 by an investment vehicle which distributes most of this income or gains annually and whose income or gains from such immovable property is exempted from tax”. It mainly considers the dividends through integrated investment tools that are aimed at immovable property, it’s more closed to the immovable property outcome naturally. According to the principle of Article (6), the original state should have exercise infinite power of taxation. Although the new gross amount of dividends is 15%, but according to the agreement and the domestic law that emphasis the principle of taxpayer, effective rate of taxation in non-resident enterprises is 10% as is ruled in the “Enterprise income tax law implementation regulations”, as for non-resident individual income, it shall be levied at the rate of 15%.
Interest. The new and the old articles haven’t changed much, what calls for special attention is that big four state-owned banks are not on the list of duty-free.
Royalties. The old DTT article (5) regulates that, the applicable tax rate of any kind received as a consideration for the use of, or the right to use, any industrial, commercial or scientific equipment is 7%, the new agreement reduces it to 6%.
he new DTT regulates that as for the gains derived by a resident of a Contracting State from the alienation of shares, the resident sate can’t own the power of taxation, for the immovable property which have more than 50 per cent of their value directly or indirectly in the original state, the original state is permitted to tax, meanwhile, as to the other profits from the alienation of shares, at any time during the 12 month period preceding the alienation has owned, directly or indirectly, at least 25 per cent of the shares of that company, the original state has the power to tax. The specific requests should refer to Tax circular 75 and its subsequent changes.
In addition, a new article is added in the new DTT, that, if the resident do substantial and regular trading on a recognized stock exchange marketing provided that the total of the shares alienated by the resident during the fiscal year in which the alienation takes place does not exceed 3 per cent of the quoted shares, then it should be taxed by resident state.
Independent individual services and income from employment. The new DTT adjusts the calculation interval of “independent individual service” and “income from employment”, transfer “if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days ….” to “in any twelve-month period commencing or ending in the fiscal year concerned…”, which indicates that SAT tends to be strict with the basis of taxation in terms of non-resident individual provide cross-border services.
Pensions. The new DTT is adopted for UN tax treaty model, that, pensions paid and other payments made under a public scheme which is part of the social security system of a Contracting State or a local authority thereof shall be taxable in original state.
Professors, teachers and students. The new DTT narrows the condition of teaching, giving lectures or carrying out research at such institution, that, if professors or teachers stay in the other side of Contracting State with such purposes for a period not exceeding two years, then no need to pay tax, if the period exceeds two years, the remuneration for such activities may be taxed when the arrival at the first-mentioned State.
Besides, for the student who is present in the first-mentioned State for the purpose of his maintenance, education or training shall not be taxed in that State, provided that such payments arise from sources outside that State, abolishing the old rules for the overseas students that the obtained scholarship, financial aid, living expenses and who is engaged in individual employment no more than 5 years with salary no more than 6,000 DM shall not be taxed.
Other income The new DTT deletes the clause that permitting the original State to share the power of taxation in terms of other income, no matter where it happens, the resident State has the exclusive right to tax.
Tax credit The new DTT improves the indirect credit condition that the German residents pay Chinese residents with dividends, the company which is a resident of China and which owns not less than 10% of the shares of the company, now the rate has increased to 20%. The condition that the income derived from the Federal Republic of Germany is dividend paid by a company which is a resident of China and which owns not less than 10 per cent of the shares of the company shall be exempted from the assessment basis of the German tax, now has improved to 25% of the shares of the company.
Besides, the old DTT regulates that: as for the tax paid by the residents of the Federal Republic of Germany according to dividends, interests and royalties they obtained in China, whatever the amount is, it’s permitted for tax credit according to 10% of the total dividends and 15% of the total amount of interests and royalties. The new agreement cancels this privilege, residents of German can only credit according to the actual amount of tax they paid in China.
New changes in the new agreement on BEPS
The new DTT supplements the part of “the standard of tax exchange information” according to OECD Model Tax Treaty, that, the scope of tax exchange is extended to the DTT implementation and the tax anti-avoidance in addition to “normal information of prevention of tax evasion”. Besides, the DTT regulates that, “if information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes”.
The new DTT adds the article of “Assistance in the collection of taxes”, that, the tax catalogue of the DTT will be covering any taxes in both countries, except such tax is conflicted with the DTT and other treaties. Meanwhile, in addition to the tax collected, the interest, penalties and costs incurred from collection or storage could be charged during the assistance in the tax collection. Besides, the Requested Party shall use same applicable laws to collect the taxes as it pursue its own taxes.
The new DTT adds the “Miscellaneous rule” article and emphasis that, “The benefits of this Agreement shall not be available where the main purpose for entering into certain transactions or arrangements was to secure these benefits and obtaining those benefits would be contrary to the object and purpose of the relevant provisions of this Agreement.” Such rules are highly consistent with BEPS of OECD and its 6th action plan.
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