Agreement between Mainland China and Taiwan to avoid double taxation on income
On August 25, 2015, the People’s Republic of China and Taiwan signed an Agreement for the Avoidance of Double Taxation regarding Taxes on Income (“the DTA”), which will enter into force when the legal procedures have been completed.
The DTA’s highlights:
1. Permanent establishment (“PE”) specifications
The DTA establishes a 12-month period presence for a building site, a construction or installation project or related supervisory activities to constitute a PE. Also, the DTA requires a presence exceeding an aggregate of 183 days in any 12-month period for service activities performed in the other contracting state to constitute a PE.
Both definitions are in line with the last DTAs China has signed.
2. Reduced withholding tax rates:
- 5% on dividends if the beneficial owner is a company holding directly at least 25% of the capital of the company distributing them; 10% otherwise.
- 7% on interest.
- 7% on royalties; payments for the use of, or the right to use, industrial, commercial or scientific equipment are excluded from the definition of royalties under the DTA.
3. Capital gains from the sale of shares are taxed in the other contracting state when (i) at least 50% of the company’s value directly or indirectly results from immovable property located in that contracting state; or (ii) the seller has owned, directly or indirectly, at least 25% of the company’s shares at any time during the 12 months before the alienation, and the contracting state of residence grants tax relief on those gains.
4. While the DTA includes anti-avoidance measures, the scope of information exchange is limited in comparison to other DTAs China recently signed.
