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China DTT with Netherlands most favourable treaty yet

China DTT with Netherlands most favourable treaty yet
On 31 May 2013, China and the Netherlands concluded a new tax treaty for the avoidance of double taxation and the prevention of fiscal income tax evasion. The new treaty may enter into force in 2014 and is one of the most favourable bilateral tax treaties that China has concluded. Consequently, the new treaty 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 New Treaty will facilitate Chinese investments in the Netherlands further.

Taxand China and Taxand Netherlands discuss this new treaty and the consequences for both jurisdictions.

  1. China inbound

Traditionally, investments from the Netherlands in China have been structured through Hong Kong intermediate holdings but this new treaty makes some investments more beneficial when made in China directly. This direct investment makes a structure less expensive to maintain, and for some income categories (eg, royalties), is also more tax-efficient and stronger from a beneficial ownership perspective. 

  • Dividend withholding tax
    The new treaty reduces withholding tax (WHT) to 5% on dividends that a Chinese subsidiary company pays to its Dutch parent company, assuming the main purpose and beneficial ownership test described further below is satisfied. The current Dutch-Chinese bilateral tax treaty provides only for a 10% dividend WHT rate. The bilateral tax treaty between the Netherlands and Hong Kong provides for a 5% dividend WHT rate so there is no benefit to utilising a Hong Kong structure. 
  • Royalties withholding tax 
    The new treaty provides for a 6% royalties WHT rate for limited types of royalties including the right to use industrial, commercial or scientific equipment. For these royalties, the new treaty is more beneficial than both the current Dutch-Chinese bilateral tax treatyand the bilateral China - Hong Kong tax treaty as the two treaties provide for a 10% and 7% royalties WHT rate respectively. Other types of royalties, however, may be taxed at the regular rate of 10% Chinese WHT, whereas the 7% rate in the Hong Kong Chinese treaty applies to all types of royalties.
  • Interest withholding tax
    The new treaty reduces Chinese interest WHT levied to a maximum rate of 10% which is  equal to most other recent tax treaties that China has concluded.
  • Capital gains
    In accordance with Chinese domestic tax laws and the current Chinese bilateral tax treaty policy, the new treaty allocates levying rights on capital gains that are derived from the disposal of shares in a Chinese resident company to China, provided that the foreign investor owns at least 25% of the shares in its Chinese subsidiary. 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. This may offer opportunities for investors/traders in the shares of Chinese listed companies.
  • Beneficial ownership
    To benefit from reduced WHT rates on dividends, interest and royalties under Chinese treaties, the non-resident must qualify as a “beneficial owner”. Chinese domestic regulations provide for guidance on establishing whether the non-resident income recipient qualifies as beneficial owner from a Chinese tax perspective. Recently the Chinese tax administration has been very strict on beneficial owner interpretation in cases where Hong Kong investors tried to claim 5% dividend WHT where, for example, the Hong Kong intermediary company's income consisted solely of dividend. Companies which already have business activities in the Netherlands may meet the Chinese beneficial ownership test more easily as a result. In practice, China also applies its domestic regulations to grant treaty relief for capital gains, even if a reference to the beneficial ownership concept does not occur within the capital gains article. 
  1. China outbound

The new treaty will offer advantages to both Chinese investors investing in the Netherlands and Chinese investors investing in foreign jurisdictions through a Dutch holding company, because:

  • The Netherlands do not generally levy WHT on interest and royalties payments made by Dutch companies. Neither do the Netherlands levy any capital tax, minimum tax or stamp duties.
  • Pursuant to the new treaty, the WHT imposed on dividends paid by Dutch companies is reduced from the Dutch domestic 15% dividend WHT rate to 5%. Various structuring possibilities exist to reduce the WHT on dividends below 5%. 
  • The new treaty provides for a WHT exemption for various government-owned financial institutions.
  • When investing through a Dutch holding company, the Chinese investors may benefit from the Dutch participation exemption regime. Dividend income and capital gains derived by Dutch holding from its shareholding in its foreign subsidiary are exempt from Dutch corporate tax, provided that the Dutch participation exemption applies. The Netherlands has concluded favourable tax treaties, which typically provide for taxation reductions and exemptions in relevant foreign source state. The Netherlands has also concluded many bilateral investment treaties, which may grant guarantees in the relevant source state, including fair and equitable treatment and protection from expropriation. Bilateral investment treaties normally allow for an alternative dispute resolution mechanism, which gives the Dutch holding recourse to international arbitration.
  1. Miscellaneous
  • Most of the other provisions of the new treaty are largely in line with the OECD Model. As China is not an OECD member, the OECD Model Treaty Guidelines may play a less important role when it comes to interpreting the new treaty.
  • The new treaty contains an exchange of information provision between the competent tax authorities, a mutual agreement procedure provision and a non-discrimination provision. The non-discrimination provision cites that, enterprises of one treaty country that have a capital which is wholly/ partly owned or controlled by one (or more) residents of the other treaty country, shall not be subjected in the first-mentioned treaty country to any taxation. They will also not be subject to any requirement which is other than the taxation and connected requirements to which other similar enterprises of the first-mentioned treaty country may be subjected.
  • The parliamentary proceedings that are part of the ratification process, will lead to more details on the interpretation of the new treaty.  

Your Taxand contacts for further queries are:
CHINA
Kevin Wang
T. +86 21 64477878
E. kevin.wang@hendersen.com

NETHERLANDS
Marc Sanders
T. +31 20 301 6633
E. marc.sanders@vmwtaxand.nl

Kuba Grabarz
T. +31 20 301 6633
E. kuba.grabarz@vmwtaxand.nl

Taxand's Take

The new treaty is one of the most favourable tax treaties that China has concluded. This, together with the Dutch domestic tax regime and its extensive tax treaty and investment treaties network, makes the Netherlands one of the most favourable holding jurisdictions for investments from and into China. 

Multinationals should investigate this treaty and look to implement new structures (and analyse restructuring possibilities) to benefit from the opportunities that this new treaty provides.

Taxand's Take Author

Marc Sanders
Taxand Board member
Netherlands

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