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China and Netherlands sign new tax treaty
On 31 May 2013, China and the Netherlands concluded a new Tax Treaty for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. Taxand Netherlands and Taxand China explore the key tax highlights of the Treaty and how it will facilitate further investment between the two countries.
Traditionally investments from the Netherlands in China have been structured through Hong Kong intermediate holdings. Due to the New Treaty however in some structures it may be more beneficial to structure investments in China directly without interposing a Hong Kong intermediate holding. This can make the structure not only less expensive to maintain, but in the case of some income types (eg royalties), also more tax-efficient and stronger from a beneficial ownership perspective.
- Dividend withholding tax: The new Treaty reduces withholding tax on dividends that a Chinese subsidiary company pays to its Dutch parent company to 5%
- Royalties withholding tax: The new Treaty provides for a 6% royalties withholding tax rate for various types of royalties
- Interest withholding tax: The new Treaty reduces Chinese interest withholding tax levied to a maximum rate of 10%
- Capital gains: Under the new Treaty the sale of shares in listed companies is being exempt from (Chinese source state) capital gains taxation, provided that less than 3% of the registered shares is sold
- Beneficial ownership: To benefit from reduced withholding tax rates on dividends, interest and royalties under Chinese treaties, the non-resident must qualify as beneficial owner
- The Netherlands do generally not levy withholding tax on interest and royalties payments made by Dutch companies. Neither do the Netherlands levy any capital tax, minimum tax or stamp duties
- Withholding tax imposed on dividends paid by Dutch companies is reduced from the Dutch domestic 15% dividend withholding tax rate to 5%. Various structuring possibilities exist to reduce the withholding tax on dividends below 5%
- The new Treaty provides for a withholding tax exemption for various government-owned financial institutions
- By investing through a Dutch holding company Chinese investors may benefit from the Dutch participation exemption regime
The new Treaty is one of the most favourable bilateral tax treaties that China has concluded. Consequently it is a valuable addition to the Dutch bilateral tax treaty network making the Netherlands one of the most favourable jurisdictions for Chinese inbound and outbound investments. China constitutes one of the largest investors in the Netherlands and the treaty will facilitate Chinese investments in the Netherlands further.