Global Tax Alert | 7 April 2014

China and Germany sign new Tax Treaty and Protocol

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On 28 March 2014, China and Germany signed the new Income Tax Treaty (the New Treaty) and the protocol (Protocol). The New Treaty and Protocol will enter into force on the 30th day following the day on which both countries notify each other of completion of their respective ratification procedures. The New Treaty becomes effective on or after 1 January following the year in which the New Treaty enters into force. This Alert highlights the key changes in the New Treaty.

Article 5, Permanent Establishment (PE), includes the following changes:

  • Construction PE – the period is extended from more than 6 months to more than 12 months
  • Service PE - the current period of more than 6 months is changed to more than 183 days.

Following the general trend of other tax treaties recently renegotiated by China, Article 10 of the New Treaty reduces withholding tax rate on dividends from the current 10% to 5% if a corporate beneficial owner directly holds at least 25% of equity interest in the distributing company. However, the New Treaty also includes a new 15% rate applicable to distributions paid out of income or gain directly or indirectly derived from immovable property by an investment vehicle. In all other cases, the current 10% applies.

Article 12 adds a reduced 6% effective rate for royalty payments for the use of, or the right to use, any industrial, commercial or scientific equipment. In all other cases, the rate remains at 10%.

Article 13, Capital Gains of the New Treaty provides a relief from capital gains tax in the following three types of share dispositions:

  • If 50% or less of the value of the shares represents directly or indirectly immovable property.
  • If the transferor holds directly or indirectly less than 25% of the shares of the disposed company for the 12-month period preceding the share transfer.
  • If shares are substantially and regularly traded on a recognized stock exchange and the total of the shares disposed by the transferor during the fiscal year in which the disposal takes place does not exceed 3% of the quoted shares.

Article 29 provides anti-abuse rules and allows both contracting states to apply domestic laws concerning the prevention of tax evasion and avoidance.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong
  • Jane Hui
    +852 2629 3836
    jane.hui@hk.ey.com
  • Becky Lai
    +852 2629 3188
    becky.lai@hk.ey.com
  • Clement Yuen
    +852 2629 3355
    clement.yuen@hk.ey.com
Ernst & Young Tax Services Limited, China
  • Walter Tong
    +86 21 2228 6888
    walter.tong@cn.ey.com
  • Henry Chan
    +86 10 5815 3397
    henry.chan@cn.ey.com
  • Andrew Choy
    +86 10 5815 3230
    andrew.choy@cn.ey.com
  • Vickie Tan
    +86 21 2228 2648
    vickie.tan@cn.ey.com
Ernst & Young LLP, China Desk, New York
  • Min Fei
    +1 212 773 5622
    min.fei@ey.com
  • Susan Qiu
    +1 212 773 9382
    susan.qiu@ey.com
  • Vickie Lin
    +1 212 773 6001
    vickie.lin@ey.com
  • Jessia Sun
    +1 212 773 5955
    jessia.sun@ey.com
Ernst & Young LLP, China Desk, San Jose
  • Diana Wu
    +1 408 947 6873
    diana.wu@ey.com
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
    chris.finnerty@ey.com
  • Jeff Hongo
    +1 212 773 6143
    jeff.hongo@ey.com
  • Kaz Parsch
    +1 212 773 7201
    kazuyo.parsch@ey.com
  • Bee-Khun Yap
    +1 212 773 1816
    bee-khun.yap@ey.com

EYG no. CM4335