The new tax treaty contains certain updated and improved provisions to further promote investment and trading between both countries. China is already a large investor in the Netherlands and this new tax treaty will further facilitate Chinese investments in the Netherlands.
When investing through a Dutch holding company the Chinese investor benefits from the Dutch participation exemption regime. Provided that there is complied with the conditions of this regime dividend income and capital gains derived by the Dutch holding company from its (foreign) subsidiary corporate income are tax exempt.
Some of the main changes in this new tax treaty between China and The Netherlands are:
- When dividends are paid to an entity which is a tax resident of the other contracting state and the ultimate beneficial owner of the dividends holds directly at least 25% of the shares of the company which is paying the dividends, the dividend withholding tax is reduced to 5% (in stead of 10% in the current tax treaty);
- Construction, assembly or installation project activities can qualify as a permanent establishment if such site, project or activities last more than twelve months (in stead of six months as in the current treaty);
- Service activities can also qualify as a permanent establishment subject to the condition that the activities are for the same or a related project and are carried out for more than 183 days within any twelve-month period. If these activities are of a consultancy nature there can also arise a permanent establishment;
- With respect to capital gains the new tax treaty allocates levying rights on capital gains which are derived from the alienation of shares in a corporate Dutch tax resident to The Netherlands if the Chinese resident investor at any time during the twelve-month period preceding the share alienation (in) directly has held a participation of at least 25% in the corporate Dutch tax resident;
- When the same Chinese tax resident investor realizes a capital gain on the alienation of shares in a corporate Dutch tax resident and the shares derive more than 50% of their value (in) directly from immovable property which is located in The Netherlands, The Netherlands is entitled to ley tax on this capital gain;
- Anti-abuse measures: for the dividend, interest and royalties article there will apply a so-called main purpose test. If the main or one of the main purposes of any person concerned with the creation or assignment of the relevant shares, debt-claims or rights in respect of which the dividends, interest and royalties are paid is to take advantage of the benefits of these articles (this tax treaty) by means of aforementioned creation or assignment, these benefits under these articles will not be available;
- The new tax treaty provides for an exchange of information between the competent tax authorities of the contracting states. The new treaty does not provide for spontaneous or automatic exchange of information however both China and The Netherlands belong to the so-called ‘early adopters group’ of the common reporting standard (OECD, February 13, 2014) which provide China and The Netherlands the legal basis for automatic exchange of information.
Please do not hesitate to contact us in case you have any further query about this treaty.
Innovative Tax
Erik Jansen
August 20, 2014