In 2013 France and China signed a new double taxation agreement (DTA) to replace the earlier DTA negotiated in 1984. The law authorising the approval of the DTA has been published in the Official Journal in November and is now effective, applying to income derived after 1st January 2015.
The DTA broadly follows the OECD Model Convention and includes provisions from new DTA’s that have recently been negotiated by both France and China with other countries.
The principal elements we summarise below:
The withholding income tax rate on dividends has been reduced to half its present level of 10% to 5%. This is subject to the provision that the corporate beneficial owners are the direct or indirect holders of a minimum of 25% or more of the capital of company distributing the dividend. They are required to have been the holders of the capital at any time over the preceding twelve month period.
The 10% withholding tax remains applicable to interest payments and royalties.
To achieve tax neutrality, those who are French tax resident can only claim a tax credit for the amount of withholding tax actually paid in China. This is a significant change from the earlier DTA under which French tax residents could obtain what was considered to be an excessive tax credit in France, regardless of the tax actually paid.
The definition of a permanent establishment (PE) has been relaxed, so the time period before a construction project, installation or assembly is qualified as a PE has increased from the present time of six months to twelve months. A similar increase has been implemented for a service PE to 183 days in any twelve month period; previously a period of six months was the qualifying period.
Additional measures include the introduction of clauses with the objective of protecting certain French incentives, in particular listed property investment companies (SIIC : Société d’investissement immobillier cotées). The existing regime of flat rate tax credits will be abolished and replaced by a tax credit that reflects the actual amount paid in China; in conformity with the OECD model.
The payment of interest, dividends and capital gains to qualifying Sovereign Funds will no longer be subject to withholding tax, except those capital gains on the disposal of real estate.
To address the differing tax treatment of certain entities in the two jurisdictions the DTA includes provisions better adapted to identifying ‘transparent’ entities, particularly in connection with the holding of real estate. The objective is to avoid the assembly of a structure regarded as transparent in one jurisdiction but opaque by the other, so resulting in double taxation. If an entity is treated as tax transparent in France the beneficial owners of the entity might benefit under the DTA if they are French tax resident.
The DTA also includes a number of specific anti-abuse clauses relating to interest, dividends, licenses and other income and a general anti-abuse clause to prevent forum shopping. In conformity with the OECD model there is provision for the exchange of tax information between the States tax authorities.
The DTA will give more tax certainty for individuals and entities doing business in the other jurisdiction and is likely to encourage activities between the two states.
Rosemont in Hong Kong and Singapore can assists clients at all stages of their market entry and expansion in China and Asia in general. We can offer clients market entry consulting, incorporation and outsourcing services, for any needs, by managing the project at its early stage and selecting and liaising with local professionals. See more about our services at www.rosemont.hk and www.rosemont.sg
For further information on our tax advisory services in Monaco please visit www.rosemont.mc