Chinese tax authorities published statement to determine the beneficial owner of DTAs with China

By Matthias Meyer, Ecovis Duesseldorf KSO
Since 2008, the People’s Republic of China levies a withholding tax of 10 percent on dividends. The withholding tax is reduced to 5 percent, according to the double taxation agreement (DTA) e. g. between China and Hong Kong.

The currently valid DTA with Germany does not provide such a further withholding tax reduction. To interpose a Hong Kong holding company could be advantageously so far. The Chinese tax authorities that decide about the granting of the reduced withholding tax rate on dividends regularly request voluminous documents to determine the beneficial owner; only the beneficial owner is allow reducing the withholding tax.
The Chinese State Administration of Taxation (SAT) published on 29 June 2012 a statement (Gong Gao [2012] no. 30) to determine the beneficial owners of tax treaties. According to this statement the qualification as a beneficial owner depends on the basis of a holistic analysis.
For this purpose, the following documents must be submitted on a regular basis:
• contract of association
• financial Statements
• cash Flow Statements
• board minutes
• organizational charts and job descriptions
• related expenditures
• function and risk analysis
• loan agreements
• agreements on the use and transfer of intellectual property
• documents proving the registration of patents and intellectual property
• agency contract
The statement helps to clarify the previously unresolved issues related to intermediate companies seated in Hong Kong or Singapore without an operative business itself and receiving dividends from a Chinese subsidiary. As before “letterbox” companies seated in Hong Kong and Singapore are not able to benefit from a withholding tax deduction.