Beware: China – Netherlands tax treaty has impact on income as of 1 January 2015

The new tax treaty provides a favourable basis for Dutch companies to start or expand activities and direct investments in China. At the same time, the treaty – combined with the Dutch participation exemption regime and extensive tax treaty network – makes the Netherlands a tax-efficient gateway into Europe and the rest of the world for Chinese companies and individuals.

Distinctive features of the new treaty are:

• In accordance with the 2010 OECD model convention, the new treaty provides that a building site or construction or an installation project is regarded as a permanent establishment only if it operates for more than twelve months. Under the previous treaty, such site or project constituted a permanent establishment if it operated beyond six months.

• Withholding tax is reduced to 5% on dividend paid by an entity in one state to the beneficial owner of the dividend that resides in the other state, if the recipient directly holds an equity interest of at least 25% in the paying entity. In all other cases, only 10% withholding tax may be levied. China’s domestic dividend withholding tax rate is 10% and the Netherlands’ domestic dividend withholding tax rate is 15%.

• The new treaty includes a specific anti-abuse provision prohibiting states from reducing withholding tax on dividends if the main motive, or one of the main motives, is to set up a structure specifically aimed at benefiting from the new treaty.

• The jurisdiction of the company realising the gain generally has the right to tax capital gains. However, the other jurisdiction may – subject to certain limited exceptions – tax capital gains on the sale of shares in a company:
  –  that directly or indirectly derives more than 50% of its asset value from real estate situated in that other jurisdiction
  –  in which the company realising the gain has directly or indirectly held an equity interest of at least 25% at any time during the 12 months before the sale.