Comparison between old and new Sino-German Tax Treaties

7 min.

By Satinna Feng, ECOVIS Ruide China

The new Agreement between the People’s Republic of China and the Federal republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income and on capital (hereinafter the “Sino-German Tax Treaties”) was signed on 28 March 2014 and might be implemented in 1 January 2005 (if both parties’ legislatures approve the treaty in 2014).

By comparison between old and new Sino-German Tax Treaties, the main changes are summarized as follows:

1. Determine tax resident identification
Old: Determined by “place of head office”
New: Determined by “place of incorporation, place of effective management”

2. Determine permanent establishment
Old: (a) A building site, or installation project in connection therewith, but only if such site, project or activities last more than 6 months;
(b) The furnishing of services, including consultancy services, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 6 months within any 12-month period.
New: (a) A building site, or installation project in connection therewith, but only if such site, project or activities last more than 12 months;
(b) The furnishing of services, including consultancy services, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 183 days within any twelve-month period.

3. Income tax rate for Dividends
Old: The tax so charged shall not exceed 10% of the gross amount of the dividends.
New: a) 5% of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25% of the capital of the company paying the dividends;
b) 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; (Because the rate of withholding income tax is 10% according to China Enterprise Income Tax law and its implementing regulations, so this clause isn’t any affected for the Germany invested enterprises in China.
c) 10% of the gross amount of the dividends in all other cases.

4. The adjusted amount of Royalty
Old: 70% (the adjusted amount) of the gross amount of the royalties, which referred to the payments of any kind received as a consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, is subject to income tax.
New: 60% of the gross amount of the royalties, which referred to the payments of any kind received as a consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, is subject to income tax.

5. Tax right of gains from property
Old: Gains derived by a resident of a Contracting State from the alienation of immovable property and situated in the other Contracting State may be taxed in that other State.
New: a) Gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.
b) Gains derived by a resident of a Contracting State from the alienation of shares, other than shares in which there is substantial and regular trading on a recognized stock exchange 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% of the quoted shares, of 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 the 12 month period preceding the alienation has owned, directly or indirectly, at least 25% of the shares of that company.

6. Independent personal services / Income from employment
Old: if his stay in the other Contracting State is for a period or periods, in the aggregate, more than 183 days in the calendar year concerned, only so much of the income as is derived from the activities in that other State.
New: if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in twelve-month period commencing or ending in the fiscal year concerned; in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in that other State.

7. Methods for elimination of double taxation
Old: a) For a resident of the People’s Republic of China, the German tax levied shall be allowed as a credit against the Chinese tax and shall not exceed the amount of Chinese tax computed, where the income consists of dividends paid by a company which is a resident of the Federal Republic of Germany to a company which is a resident of the People’s Republic of China and which owns at least 10% of the capital of the first-mentioned company.
b) For a resident of the Federal Republic of Germany, there shall be excluded from the basis upon which German tax is imposed, in the case of dividends the foregoing provisions shall apply only to such dividends as are paid to a company (not including partnerships) being a resident of the Federal Republic of Germany by a company being a resident of the People’s Republic of China at least 10% of the capital of which is owned directly by the German company.
New: a) In China, where a resident of China derives income from the Federal Republic of Germany, the amount of tax on that income payable in the Federal Republic of Germany in accordance with the provisions of this Agreement may be credited against the Chinese tax imposed on that resident. The amount of the credit, however, shall not exceed the amount of the Chinese tax on that income computed in accordance with the taxation laws and regulations of China.
Where the income derived from the Federal Republic of Germany is dividend paid by a company which is a resident of the Federal Republic of Germany to a company which is a resident of China and which owns not less than 20% of the shares of the company paying the dividend, the credit shall take into account the tax paid to the Federal Republic of Germany by the company paying the dividend in respect of its income.
b) In the Federal Republic of Germany, unless foreign tax credit is to be allowed there shall be exempted from the assessment basis of the German tax any item of income arising in China and any item of capital situated within China which, according to this Agreement, may be taxed in China.
In the case of items of income from dividends, the preceding provision shall apply only to such dividends as are paid to a company (not including partnerships) being a resident of the Federal Republic of Germany by a company being a resident of China at least 25% of the capital of which is owned directly by the German company and which were not deducted when determining the profits of the company distributing these dividends.

Our observations and suggestions

-The new Sino-German tax treaties, changes in the dividend tax rate have the greatest influence on the German invested enterprises in China. Because for most of German invested enterprises in China, the dividend tax rate will be reduced from 10% to 5%, and these dividends shall be excluded from the basis upon which German tax is imposed (the shares held shall not less than 25%).

-whether the independent personal services and income from employment to pay personal income tax in China, the coverage is expanded in the determination of time and have an impact on the foreigners in China.

-Where a German company to undertake construction/ installation projects in China, the condition is relaxed whether it’s determined as a permanent establishment.

Contact person

Lawyer in Heidelberg, Richard Hoffmann
Richard Hoffmann
Lawyer in Heidelberg
Phone: +49 6221 9985 639
E-Mail