Double Taxation Agreement between China and the United Kingdom and Northern Ireland

Published on 2017-01-06

If you decide to utilise your existing UK Company to become the shareholder of your China investment, please note that there is a Double Taxation Agreement between the UK and China and you can benefit as follows:

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The new Double Taxation Agreement (DTA) between China and the United Kingdom was ratified on 13 December 2013 and entered into force in both countries under the following circumstances: 

  • In China: in respect of profit, income and capital gains arising in any tax year beginning on or after 1 January 2014. 
  • In the United Kingdom: in respect of income tax and capital gains tax, for any year of assessment beginning on or after 6 April 2014. In respect of corporation tax, for any financial year beginning on or after 1 April 2014.

Dividends Tax

The withholding tax rate applied to dividends taxed in China has been lowered to 5%, compared to the previous 10%. This new rule applies only where the beneficiary owner of the dividend directly holds 25% or more capital in the dividend-paying company.

Withholding Tax

Withholding Tax (WT) is charged on an array of service fees billed by a company in its home country to a company (which could be either a client or a subsidiary) in China for the service the former provides to the latter. As profits tax cannot be charged to a company that is nonresident, WT takes its place. The amount of WT varies considerably depending upon the service provided. 

  • Effective withholding tax rate for royalties is reduced from 7% to 6%. 
  • The withholding tax rate for license fees has remained at 10%

While Chinese foreign-invested entities can sign a variety of service agreements with foreign companies, including with their headquarters (HQ), these agreements can sometimes be looked upon with suspicion as ‘constructed channels’ for sending money between the HQ and its subsidiary.

It is important to bring the intent to use the DTA to the attention of the local tax office in China, together with copies of the DTA (in Chinese) with the articles of association and business license of the company. Permission is required by tax officials in China to reduce the amount of taxes due from the company and they need to provide an explanation to their own superiors. Accordingly, a well presented case needs to be made. It is advisable that this involve assistance from a professional firm in China qualified to assist. However the tax savings obtained typically outweigh the fee burden charged for the service.

Permanent Establishment

The 1984 DTA provision permitted a 7% withholding tax to be imposed on technical fees, regardless of whether the technical services had created a Permanent Establishment (“PE”). The new DTA has removed the technical fees provision and a Services PE provision has been introduced, which applies 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 as, in practice, local tax authorities in China have applied this rule by counting one day’s presence in a month as a whole month; this can significantly increase the PE risk even though the actual length of stay in China is limited. 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.

Capital Gains

For UK investors into China, another key benefit of the new DTA is the relief 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%. The 1984 DTA did not exclude any China sourced share disposal gains from the imposition of tax in China.

Transfer Pricing

It should be noted that under the banner of WT, services and IP issues, such structures can become complicated, and there are additional rules to cater for fair and reasonable use over this. These rules come under China’s Transfer Pricing regulations.

For more information please refer to the China-United Kingdom Double Taxation Agreement here.