China Tax Alert - Issue 1, January 2014
The new People's Republic of China (PRC) - United Kingdom (UK) double tax agreement (DTA), replacing the 1984 PRC-UK DTA, entered into force on 13 December 2013 and is effective from 2014 onwards. The DTA provides for lower levels of dividend and royalties withholding tax (WHT) than under the 1984 DTA, and also provides for the exclusion of certain capital gains on minority shareholdings from capital gains tax. It also tightens up the DTA permanent establishment (PE) provisions, allowing for greater certainty in their application. Meanwhile, in line with the thrust of tax policies in both the UK and China in recent years, the new DTA introduces new anti-abuse provisions and facilitates the application of domestic anti-avoidance measures.
The final entry into force of the new PRC-UK DTA is very welcome. It is anticipated that some restructuring of investment arrangements, from the UK into China, may follow from the increased tax efficiency of direct investments resulting from the new DTA provisions, and there will be greater advantages going forward in using UK holding companies for China-EU investment flows.