the new double taxation agreement(“DTA”) between the UK and China
On December 13, 2013 the new double taxation agreement(“DTA”) between the UK and China came into effect, and replace the old DTA signed in 1984. And in China, it came into operation since January 2014. And now, let’s make a brief comparison between the two versions.
1. Q: what’s the main difference between the two versions of DTA between the two countries?
A: Firstly, for UK residents investing in China, the withholding tax rates on capital gains, technical fees and other property incomes have different degrees of decrease. And secondly, the new DTA has removed the technical fees provision and a services Permanent Establishment (“PE”) has been introduced.
2. Q: What are the new withholding tax rates under the new DTA?
A: the table below sets out the keys changes to withholding tax rates on various types of income:
| China domestic | UK domestic | Old DTA rate | New DTA rate | Dividends | 10% | 0% | 10% | 5/10/15% | Interest | 10% | 20% | 10% | 10% | Royalties | 10% | 20% | 7/10% | 6/10% | Capital gains | 10% | 0% | 10% | 0/10% |
3. Q: How do the new withholding tax rates be applied respectively?
A: For the capital gains, according to the new provisions, a maximum dividend withholding tax of 5% will be imposed if corporate investors beneficially own at least 25% of the capital of the dividend paying company while previously the withholding tax rate was 10%.
For the technical fees, the new service PE provisions apply where the provision of services is for a period of more than 183 days in a 12 month period. This is more generous than the PE test of “6 months in a 12 month period” as provided by the existing DTAs signed by China with other countries.
4. Q: Is there any difference between the two countries on the applications of the new withholding rates?
A: Firstly, it goes to the 25% withholding requirement. The original provisions in the 2011 treaty (The new double taxation agreement was originally signed in London between the UK and China in June 2011 but its implementation was delayed.) which permitted indirect holdings to be taken into account in reaching the 25% threshold, as well as direct holdings. But following the requested Chinese reversions, the reduced 5% withholding tax rate now only applies where the 25% is held directly. The reduction in withholding tax rates to 5% and 10% are important for UK residents investing in China but not significant in the other direction. This is because under current UK law, the UK does not generally impose withholding tax on dividends (other than property income dividends paid by REITs), so Chinese investing in the UK would not suffer withholding tax on dividends in any event.
Secondly, it is a key benefit of the UK investors to China that they are released from tax on capital gains on disposals of holdings of less than 25% in Chinese companies, except for property-rich companies, whereas previously the capital gains on disposal of shares in China would be subject to withholding tax at 10%.
5. Q: What’s the effect of the new services PE provision may have?
A: It can significantly increase the PE risk even though the actual length of stay in China is limited, since it is more generous than the PE test of “6 months in a 12 month period” as provided by the existing DTAs signed by China with other countries. As such, the abolition of the technical fee payment article and the introduction of the Service PE provision provide a greater degree of certainty for service activities undertaken by UK enterprises in China to reduce the risk of creating a PE.
In conclusion, the new UK - China DTA provides the most favorable treaty benefits under the current treaty network of China, and take this together with the generous UK regime involving no withholding tax on dividends and normally no tax on capital gains for non-residents, as well as interest deductions on loans financing foreign equity investments (subject to certain limits), the UK may now be regarded as a very competitive jurisdiction for both Chinese investment within the EU and investment by other EU countries into China. And the long-awaited entry into force of the UK-China DTA is appealing for UK companies looking to make investment into China given the increased tax efficiency.
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