Sino-French Double Tax Treaty
On November 26th, 2013 French and Chinese governments have agreed upon a double tax treaty aiming at reducing taxes on companies investing in both France and China. The update was much needed since this text had not been modified for 30 years. It aligns with the tax treaties China has signed with the other European countries. Even though it will unlikely be effective before January 2015 – both countries are currently in the ratification process – it is worthy to have a look at the novelties introduced by the treaty so as to forecast its impact on your company.
For more clarity, the main changes introduced by the new double tax treaty are summed up in the table below.
|Construction Permanent Establishment||The threshold has been extended at 12 months||It was 6 months under the old treaty|
|Service Permanent Establishment||“6 months within 12 months” becomes “183 days within 12 months”||Under the old treaty, 1 worked day and 29 non-worked days could be counted as a full worked month. It is now counted as 1 day|
|Agency Permanent Establishment||If an agent in China is exclusively working for a French company, the latter should establish an Agency Permanent Establishment.||An agent who is not working exclusively for a company is called “independent”. This status is easier to get under the new treaty|
|Dividends||Taxed at the source country. 5% if the beneficiary hold >25% of the shares, else 10%||Partnerships and groups will always be taxed at 10%. Under certain circumstances, it can be more than 10%|
|Interests||10%||Guarantee and penalty fees aren’t regarded as interests anymore|
|Royalties||10%. Exception for equipment rental: 6%|
|Capital Gain||Entities with assets mostly immovable: taxation where the immovable assets are||Mostly immovable: >50% of the assets are immovable at any time during the past 36 months|
|Other Entities: source country can tax if the relevant share-holding ratio exceeds 25%||Direct and indirect hold shall be counted|
|Business Profit||No more exception and restriction in its calculation. Permanent Establishment is now a distinct entity from the Head Office or any other Permanent Establishment||The new treaty aims at simplifying the tax calculation|
Tax Resident Status(non-individual tax payers)
|The “place of Head Office” criteria is replaced with “place of effective management”||The Head Office criteria could lead to double taxation.|
Tax Resident Status
(Individual tax payers)
|New set of criteria to solve disputes over place of taxation: “Permanent home”, “center of vital interests”, “nationality”.||This new set of criteria will enable to decide where the tax should be paid.|
|Partnerships and groups||A new set of criteria will ease the taxation process of such entities|
|Other Income||The source country won’t tax anymore: only the home country can.|
|Methods to eliminate double-taxation||French tax must be taken into account when an entity A in China receives dividends from French company B, provided that A holds 20% of B shares||Old treaty asked only for 10% of shares. This is an alignment measure with Chinese Tax Law|
|Virtual tax credit has been eliminated on the French side||Only Chinese tax actually paid can be counted when calculating tax credit in France|
S.J. Grand Observations
- The reduction of taxes on companies will boost investments. The extension of the Construction Permanent Establishment threshold and the shift from a monthly to a daily basis for the Service Permanent Establishment will improve French investors’ confidence in the Chinese market, enabling them to better predict their tax burden. As France is reaching economic neutrality with China by removing tax credits, Chinese investors will be more likely to invest in France.
- The reduction of tax on dividends may turn some intermediary holding companies in low-tax countries (Hong-Kong, Singapore…) useless. However, they still have a purpose when it comes to royalties and interests.
- It should be noted that the treaty sets new measures aiming at preventing abuses of the Double Tax Treaty. Therefore, companies should be prepared to comply with them by January 2015.