Denmark New Hub for Euro-Chinese Relations
The Danish Minister of Taxation and the Chinese ambassador to Denmark have recently signed a new tax treaty. The new treaty is intended to facilitate investments from China through Denmark into Europe (and vice versa), whilst making Denmark a hub for Euro-Chinese trading relations. No Danish withholding tax will be levied on qualifying distributions to China, while a five percent Chinese withholding tax may be levied on qualifying distributions to Denmark. Taxand Denmark investigates the treaty further, and the impact that this new relationship could have on businesses worldwide.
A number of agreements were concluded between Danish and Chinese parties, including a new tax treaty which replaces an original treaty concluded in 1986. The new treaty is based on the OECD Model Tax Treaty and is planned for Danish implementation in Autumn 2012. If both the Danish and the Chinese implementation processes are completed by the end of 2012, the new treaty may come into force on 1 January 2013. Of particular interest, the new tax treaty amends the definition of a permanent establishment and the taxation of dividend distributions of the tax treaty of 1986.
1. Dividend distributions
According to the 1986-treaty, dividends distributed may be taxed at a rate of up to 10 percent by the source country. The new tax treaty reduces the applicable tax rate to 5 percent, provided the recipient is a corporate shareholder holding at least 25 percent of the shares in the distributing company. For all other shareholders the applicable tax rate continues to be 10 percent. To our knowledge, the 5 percent tax rate is among the lowest withholding tax rates available in any tax treaty yet concluded by China.
2. Permanent establishments
The 1986-tax treaty states that a building site will only constitute a permanent establishment if activities continue for more than six months, while installations (incl. drilling rigs and ships) may constitute a permanent establishment if used for exploration or exploitation of mineral resources for in a period of more than three months.
The amendments entail that unless either activity extend beyond a twelve month period, no permanent establishment is created.
The new tax treaty between Denmark and China grants favourable possibilities for Chinese investors in Europe as well as for European investors in China. Investors may benefit from the many tax treaties concluded by Denmark in recent years, allowing for dividends to be streamed through Danish entities to recipients in both China and other countries without Danish withholding tax. Denmark may thus prove an attractive base for investments to and from China.
Through our Chinese Desk in Copenhagen and our representative office in Shanghai, Bech-Bruun has obtained significant experience advising both European clients investing into China as well as Chinese clients investing into Europe and will accordingly be able to assist in any such matters.