China inks new treaties with Denmark, Netherlands

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In June 2012, China and Denmark signed a new double tax treaty, replacing the previous treaty that was concluded in 1986. The ratification procedures for the Denmark treaty have been completed by both countries. The treaty entered into effect on 27 December 2012 and is applicable to income obtained after 1 January 2013.

china-inks-new-treaties-with-denmark-netherlands

On 31 May 2013, China and the Netherlands signed a new double tax treaty that will replace the existing treaty of 13 May 1987. The ratification procedures are pending.

Terms of the two new treaties are among the most preferential that have been concluded by China in any of its treaties in recent years:

  • Both new treaties have reduced the applicable tax rate on dividends to 5%, provided the recipient of the dividend is a corporate shareholder that holds at least 25% of the shares in the distributing company. For all other shareholders, the applicable tax rate continues to be 10%.
  • Like many other tax treaties negotiated by China, the old treaties allowed the source country to tax capital gains (arising from direct or indirect disposal of shares). The new treaties allow the source country to apply its domestic capital gains tax rules only when the resident of the other country owns (directly or indirectly) at least 25% of the shares in the disposed subsidiary. In addition, under the Netherlands treaty, the sale of shares in listed companies may be exempted from capital gains tax in the source state under certain circumstances.
  • Both new treaties contain provisions to deny preferential withholding tax rates on dividends, royalties and interest if the main purpose test is not met. The main purpose test states that withholding tax reductions should not be granted if the main purpose for paying the dividend, interest or royalty payments to a recipient in the treaty partner state was to take advantage of the treaty benefits.

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Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker & McKenzie by e-mail at: Zhang Danian (Shanghai) danian.zhang@bakermckenzie.com

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