Treaty protection for gains from quoted shares
The provision for additional protection for gains from quoted shares was added in the Capital Gains article (Article 13)2.
Under the old DTA, China retains the taxing right to gains from disposal of shares of companies “situated” in China. In fact, one could not find specific provisions for disposal of “shares” granting China such rights, but only to find authority in the provision for “other property” to the same effect.
Under the new DTA, the capital gains article adopted the standard capital gains clauses found in China’s recent DTAs. For example, Clause 4 of the article dictates that China may only tax gains from disposal of shares of Chinese property-rich companies; Clause 5 gives China the right to tax gains from disposal of Chinese non-property-rich company shares, provided that the investor held at least 25% of that company’s capital at any time during the 12 month period preceding the disposal. Similar clauses, though worded somewhat differently, can also be found in the capital gains article of the China-Hong Kong DTA.
Intriguingly, the capital gains article doesn’t end just there. Clause 6 goes on to offer relief from the Chinese tyranny of the two preceding clauses. It exempts shares quoted on a recognized stock exchange, provided that the total shares disposed of during the year of disposal does not exceed 3 percent of the quoted share. Also, shares owned by the Dutch government or its institutions are also exempt. This clause effectively allocates the taxing right to the residence state of the Netherlands.
A similar protection clause can also be found in the new China-Belgium DTA3. But that similar clause only covers shares of non-property-rich companies. On the other hand, the protection is greater under the new China-Netherlands DTA because it makes no distinction between property-rich and non-property rich companies.
Other changes
Other changes to the old DTA feel more like technical updates, bringing it to the prevailing standards of the day.
The good news for Netherlands investors is that the withholding tax rate for dividends was reduced to 5%, provided that the dividend’s beneficial owner directly holds at least 25% of the capital of the Chinese company paying the dividend. And the time threshold for creating a service permanent establishment (“PE”) was changed from 6 months to 183 days, with a construction PE to require 12 months instead of 6 months. And the dropping of tax sparing credit for interest and royalties, the introduction of limitation of benefits clauses and the acknowledgement of allowing domestic general anti-avoidance rule to prevail are all modern tax treaty clichés.
Footnotes:
2. Comparisons of the old and new Article 13 of the China-Netherlands DTA:-
| Before | After |
ARTICLE 13 CAPITAL GAINS
1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.
2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base, may be taxed in that other State.
3. Gains from alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.
4. Gains derived by a resident of a Contracting State from the alienation of any property, other than that referred to in paragraphs 1, 2 and 3, which is situated in the other Contracting State, may be taxed in that other State.
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ARTICLE 13 CAPITAL GAINS
1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.
2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such a fixed base, may be taxed in that other State.
3. Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships or aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.
4. Gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.
5. Gains derived by a resident of a Contracting State from the alienation of shares of a company which is a resident of the other Contracting State may be taxed in that other Contracting State if the recipient of the gain, at any time during the twelve month period preceding such alienation, had a participation, directly or indirectly, of at least 25 per cent in the capital of that company.
6. However, the provisions of paragraphs 4 and 5 shall not apply to gains derived from the alienation of shares:
a) quoted on a recognised stock exchange, provided that the total of the shares alienated by the resident during the fiscal year in which the alienation takes place does not exceed 3 per cent of the quoted shares; or
b) held by the Government of a Contracting State, any of its institutions or any other entity the capital of which is wholly owned by that Contracting State, provided that such institution or entity is a resident of that Contracting State.
7. Gains from the alienation of any property, other than that referred to in paragraphs 1 to 5, shall be taxable only in the Contracting State of which the alienator is a resident. |
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