Double Taxation Agreement With China

The BEPS DAPE rule is explained in the updated OECD Model Commentary in that it focuses on whether a local representative of a foreign company has “convinced” local market customers to enter into contracts with the company. This is clearly a lower threshold than the existing rule, which focuses on whether the foreign company has “authorized” the local representative to enter into contracts related to it. In this context, it may be necessary to review existing marketing, marketing support and distribution agreements in mainland China. However, the policy of the double taxation treaty facilitates non-Chinese companies by reducing the amount of withholding tax to about 50%. This provision is particularly useful for multinationals with subsidiaries in China. For example, when a China-based subsidiary uses the intellectual property of an IMC, it only has to pay about 10% of the WHT instead of the initial 20% for the royalties of the services used. The work is based on two pillars. The first pillar aims to change the fundamental elements of the international tax by introducing non-physical thresholds for taxable remote presence (in addition to traditional PEs for physical presence) and profit allocation form rules that would operate at the level of multinationals in conjunction with traditional transactional clearing rules based on non-competition principles. It should be noted that the Chinese tax authorities are thoroughly examining the avenues of transaction between their foreign subsidiaries in order to eliminate the possibilities of operating an IMC, reduce its taxable income by using transactions of a close party. In order to avoid any delay, it is therefore recommended that a Chinese company clearly express its intention to apply for double taxation relief. This strategy saves time for both the applicant and the tax authorities.

As welcome as these changes are, the lack of inclusion of such provisions in the new protocol with Hong Kong SAR, the main investment channel in mainland China, is regrettable. It should also be noted that many investments are made in China through partnerships between the Cayman Islands and the British Virgin Islands (BVI). Since these jurisdictions do not have tax agreements with China, there is no predictable solution to this problem for partnerships within these jurisdictions. In recent years, there has been a kind of slump in China`s signing of major tax treaties. The beneficiary countries of the double taxation convention in this region are Albania, Armenia, Austria, Belarus, Bulgaria, Belgium, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Latvia, Lithuania, Luxembourg, Macedonia, Malta (signed but not yet effective) Moldova, Norway, Sweden, Iceland, Ireland, Italy, Netherlands, Poland, Portugal, Romania, Russia, Serbia and Montenegro, Slovakia, Slovenia, Slovenia, Switzerland, United Kingdom (Great Britain), Ukraine, Uzbekistan and Bosnia and Herzegovina. . . .

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