The Netherlands and China signed a new Tax Treaty for the Avoidance of Double Taxation and Prevention of Fiscal Evasion on 31 May. Once in effect (no earlier than 1 January 2014), it will replace the current tax treaty, which was signed in Beijing on 13 May 1987.
The treaty clearly purports to further improve investment opportunities. For investors, the main advantage of the treaty is a reduction in the dividend withholding tax rate from 10% to 5% on shareholdings of 25% or more. For shareholdings of less than 25% the preferential treaty rate will remain 10%. The treaty also provides explicit provisions designed to counteract "treaty shopping". The treaty provides explicit provisions designed to counteract treaty shopping and contains an expanded exchange of information provision.
Main changes and new rules
The dividend withholding tax rate is reduced from 10% to 5% on shareholdings of 25% or more
A 0% dividend withholding tax rate is now available when the recipient beneficial owner is the government or a state-owned enterprise
The tiebreaker rule for determining residence under the treaty when an entity is resident in both contracting states has been brought in line with the OECD model treaty
The test for a building site, construction, assembly or installation project (as well as supervisory activities in connection therewith) constituting a permanent establishment has been extended from six months to 12 months
As under the current treaty, royalties arising in a contracting state and beneficially owned by a resident of the other contracting state may also be taxed in the former contracting state. However, the new treaty divides royalties into two categories. The taxable amount for payments of any kind received as a consideration for the use of, or the right to use, industrial, commercial, or scientific equipment is adjusted to 60 percent of the gross amount and thus effectively reduces the amount of royalty withholding tax payable
Gains from the alienation of shares of a company may be taxed in the contracting state in which the company is a resident provided the recipient of the gain has had, at any time during the 12-month period before the alienation, a direct or indirect participation of at least 25% in the capital of the company
Remuneration derived by a resident of a contracting state in respect of an employment exercised aboard a ship or aircraft operated in international traffic may now be taxed in the contracting state where the place of effective management is situated. Under the current treaty, only the contracting state in which the employee resides is allowed to tax
A new provision allows the contracting state that fiscally facilitated a pension accrual to tax the pension and other similar remunerations
The provision that provided an income tax benefit to teachers and researchers resident in one contracting state and visiting the other contracting state for the primary purpose of teaching or undertaking research has been removed
The tax sparing credits for interest and royalties will no longer be available
The method used by the Netherlands to eliminate double taxation of director's fees will be the credit method instead of the exemption method. Further, a new provision clarifies the term "member of the board of directors" used in article 16 (directors' fees)
A new provision expressly preserves the application of domestic anti-avoidance provisions1
The new treaty contains expanded and strengthened provisions on exchange of information
A new provision provides for assistance in the collection of taxes.
Expected date of entry into force
The treaty still needs to be ratified according to the legislation of both the Netherlands and China. Upon notification of completion of ratification procedures, it will enter into force on the last day of the month following the date of the last notification. The treaty will become effective as of 1 January following the calendar year in which the treaty enters into force.
China's anti-tax abuse campaign
The treaty's anti-treaty-shopping provisions deny preferential tax treaty rates for dividends, interest and royalties when (one of) the main purpose(s) of the creation or assignment of rights is to take advantage of the Treaty benefits. The introduction of these provisions is in line with China's anti-tax abuse campaign that started in 2008 with the introduction of general anti-avoidance rules in China's corporate income tax law2, which paved the way for the introduction of extensive tax enforcement measures, including anti-treaty shopping Circular 6013, and the infamous Circular 6984 targeting indirect equity transfers in Chinese resident enterprises, where the offshore holding company lacks commercial substance. As article 23 of the new treaty expressly preserves the application of domestic anti-avoidance provisions, China can (and will) continue to apply its extensive tax enforcement measures, including circulars 601 and 698.
The Netherlands heading toward 100 tax treaties
The signing of the new tax treaty combined with the already highly attractive Netherlands holding regime may well make the Netherlands the inbound and through-bound jurisdiction for Chinese Investment in the Netherlands and beyond.
The expansion and improvement of the already extensive and high-quality Dutch treaty network is clearly a priority of Dutch State Secretary of Finance Frans Weekers. The Netherlands has signed 97 bilateral tax treaties5, and is in treaty negotiations with Algeria, Chile, Colombia, Cyprus, Iraq and Kenya. Also, the Netherlands will this year start discussions on concluding tax treaties with Costa Rica, Tadzhikistan, Tanzania and Uruguay6. The Netherlands could very well have 100 bilateral tax treaties in place within the year.
1 Article 23 (Miscellaneous rule)
2 Article 47 of the Chinese Enterprise Income Tax Law provides that if an enterprise enters into any business arrangement without reasonable business purposes that results in reduced taxable revenue or income, the tax authority is entitled to make adjustments based on reasonable methods
3 Guo Shui Han  No. 601 titled Notice On Interpretation And Determination Of Beneficial Owner Under Tax Treaties
4 Guo Shui Han  No. 698 titled Circular on Strengthening the Administration on Collection of Enterprise Income from Enterprise Transfers by NonresidentEnterprises and issued by the State Administration of Taxation of PRC
5 Tax treaty overview as at 1 Apr 2013, available at the website of the Government of the Netherlands
6 Negotiations tax treaties 2013, newsflash published on the website of the Government of the Netherlands on 26 Apr 2013