Main features of the new China-France double tax avoidance agreement

The last PRC-France double tax avoidance agreement had been signed in 1984 ; and has now been replaced by the most recent one, dated from 26 November 2013.

The agreement provides for lower levels of dividend withholding tax ; also provides more precise Permanent Establishment provisions, as well as special treatment of Sovereign Wealth Funds. It also introduces new anti-abuse provisions and provides for better administrative cooperation between the two countries in this area.

Let us first have a look at the changes in the main tax rates. The old 1984 agreement provided for a dividend withholding tax rate of 10%. As of now, the new agreement also uses this rate as a general rate but completes it with a 5% rate which is applicable when direct shareholdings of 25% and above are held in a company of the other state.
In both the old agreement and the new one, the normal tax rate for interest and royalties is 10% (6% for royalties for use of or right to use industrial, commercial or scientific equipment).

The tax rate applicable to sovereign wealth funds has also known a modification : a 0% withholding tax rate will apply to dividends, interest and capital gains, other than those in relation to immovable properties, derived by sovereign wealth funds.

The situation of partnerships is a tricky one, as it is often complicated to determine which person may be considered 'subject to tax' and the 'resident' entitled to benefit from the application of the double taxation avoidance agreement. The determination is made by reference to : the source of profits ; the state in which the partnership is organized ; and whether income is treated as the partnership’s or the partners’.

A more precise definition of the Permanent Establishment (PE) has also been drawn out. For construction and installation projects can now constitute a PE only if they last for more than 12 months, as against 6 months in the 1984 agreement. For service PE, a PE will now exist where the services have been provided for more than 183 days in a 12 month period; as against 6 months in a 12 month period in the 1984 agreement.

Clarifications on the calculation of PE profits are also provided, mainly : a PE is not to be taxed on its total trade receipts but on the remuneration for its actual activity ; and PE used for installation, construction and public works projects are to be taxed only on the part of the project actually undertaken by the PE.

All in all, this new agreement will prove to be useful in clarifying and making more complete the PRC-France cooperation on taxation. Though the partnership provisions are limited in direct application, they will surely be useful to lay down precise tax bases on how to deal with partnerships in cross-border situations. The provision saying that gains not dealt with elsewhere in the article are reserved to the residence country is also interesting as it reduces the level of uncertainty.