Double-Tax Treaties in China

Introduction

Companies and individuals can qualify for double taxation relief if they meet certain conditions. Beyond simply removing extra tax, there are a few other things worth understanding about how this works.

This guide explains what double taxation is, who can benefit from China's tax treaties, and how the relief process works.

What Is Double Taxation?

Double taxation happens when the same income gets taxed twice, usually because two different countries both claim the right to tax it. To prevent this, countries sign double taxation agreements (DTAs) with one another.

Who Can Benefit From a DTA

To claim DTA benefits, a person must be a tax resident of a country that has signed a DTA with China, and the benefit they are claiming, whether a tax exemption or a reduction, must be one the DTA actually allows.

Beneficial owner

A beneficial owner is a person, company, or group that truly owns and controls income or the property that produces it. This concept matters most when claiming DTA treatment on dividends, interest, and royalties.

Tax authorities run a full review to check whether a non-resident qualifies as the beneficial owner. Five warning signs can work against an applicant:

• Passing on 50% or more of the income to a resident of a third country within 12 months of receiving it
• Business activities that do not amount to real, substantive operations
• The recipient pays no tax on the income, or the income isn't taxable where they live, or if it is, the effective rate is extremely low
• Other loan or deposit agreements exist between the creditor and a third party with a similar amount, interest rate, and signing date to the loan generating the interest
• A license or transfer deal exists between the non-resident and a third party covering the right to use or transfer a copyright, patent, or piece of technology, from which the royalty is paid

Safe harbour rule

China's tax authority offers a safe harbour rule so some applicants can skip the full review and still claim DTA benefits.

For dividends, the safe harbour rule applies to:

• A company that is a tax resident and listed in a country with a valid DTA with China
• The government of the DTA partner country
• An individual resident of the DTA partner country
• A subsidiary that is 100% owned, directly or indirectly, by one or more parties already covered by the safe harbour rule

Countries With a DTA With China

China has signed double tax agreements with the following countries and jurisdictions:

Who Counts as a Tax Resident

Individuals

A person is a tax resident if they are a Chinese citizen, or a non-Chinese citizen who has stayed in China for more than 183 days in a tax year. Anyone in China for fewer than 183 days is a non-resident for tax purposes.

Enterprises

A company is a tax resident if it was set up in China under Chinese law, or if it was incorporated abroad but is effectively managed from China. A company is a non-resident if it is based abroad, managed from abroad, but still has an establishment in China.

What Is a Permanent Establishment?

A permanent establishment (PE) is a fixed place where a company carries out its business.

If a non-resident company is a tax resident of a DTA country and has no PE in China, it may be able to claim relief from corporate income tax there. But if that same company runs its business in China through a PE, the profits it earns will be taxed in China.

China recognizes four common types of PE:

• Fixed place PE: a fixed location where all or part of the business is carried out
• Construction PE: a building site, or a construction or installation project, running for a set length of time
• Agency PE: an agent based in China who signs contracts and manages orders on the company's behalf
• Service PE: employees working in China for six months, or 183 days, within any 12-month period

Income Covered by DTAs

Immovable property

Income from immovable property is taxed in the country where the property sits.

Business profits

A company's profits are taxed only in its home country, unless it runs its business in the other treaty country through a permanent establishment.

Shipping and air transport

Income from shipping or air transport is taxed only in the country where the airline or shipping company is based.

Dividends, interest, and royalties

Dividends paid by a company resident in one treaty country to a resident of the other are generally taxed in that other country.

That said, the country where the paying company is based can also tax the dividend. If the beneficial owner lives in the other treaty country, though, the tax rate cannot go above the cap set in the DTA.

Interest paid from one treaty country to a resident of the other may be taxed in that other country. The same rule applies to royalties owned by a resident of the other treaty country.

Capital gains

Gains a resident of one country makes from selling immovable property located in the other treaty country may be taxed in that other country.

Directors' fees

Directors' fees paid to a resident of one country, for serving as a director of a company based in the other treaty country, may be taxed in that other country.

Eliminating Double Taxation

Every DTA includes a clause allowing tax already paid in one treaty country to be credited against the tax owed in the other.

Exchange of Information Agreements

China uses exchange of information agreements to improve tax transparency, fight tax evasion, and support global tax cooperation.

These rules are built into China's DTAs, and China has also signed standalone tax information exchange agreements with Argentina, the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Liechtenstein, and San Marino.

Mutual Agreement Procedure (MAP)

What is the MAP?

The Mutual Agreement Procedure (MAP) is a dispute resolution process built into double tax treaties, handled by the State Administration of Taxation (SAT).

When to request a MAP

A Chinese taxpayer can request a MAP when they believe their taxation does not follow the rules set out in a DTA. The request must be filed within three years of the first notice of the disputed tax action.

Applying for a MAP

Taxpayers must submit an Application for Initiating Mutual Agreement Procedures Concerning Special Tax Adjustment, along with supporting information, to the SAT within the timeframe set by the relevant DTA. The application must be filed in both English and Mandarin Chinese.

Why a MAP application might be rejected

The SAT can turn down a MAP application for reasons such as:

• The taxpayer or related party is not a tax resident of China or the treaty partner country
• The issue raised is not a special tax adjustment matter
• The request lacks a solid factual or legal basis
• The request does not follow the terms of the DTA
• The related special tax adjustment case is still open, or the taxpayer has not yet paid tax owed from a case that has already closed

Why a MAP might be terminated

The SAT can end a MAP process when:

• The taxpayer or related party submits information that is irrelevant, false, or incomplete
• The taxpayer asks to withdraw or end the process
• The relevant tax authority or treaty country withdraws or ends the process

Conclusion

China has signed over 100 double tax treaties with countries around the world, giving companies a way to avoid being taxed twice on the same income.

If you'd like guidance on making the most of these treaties, Signum can help.