On 28 March 2014, representatives of the Federal Republic of Germany and the People's Republic of China signed a new double taxation agreement in Berlin. This treaty will probably become effective on 1 January 2015. The current DTT between Germany and China dates back to 1985. The “new” DTT contains only a few changes to the OECD Model Tax Convention 2010 (OECD MTC 2010). Some of the specific provisions deviating from the OECD Model Tax Convention are described briefly below.
Firstly, the so-called Authorised OECD Approach (AOA) for profit attribution to permanent establishments (PE) has not been implemented in the new DTT, so that the PE is not treated as a separate entity for profit allocation purposes. Instead, the apportionment of profits between the head office (parent company) and the PE has to be done in accordance to the arm's length principle as laid down in the OECD Model Tax Convention 2008 (OECD MTC 2008). Regarding the requirements for a PE to exist, the DTT contains a provision for service PEs which says that, even if no fixed place of business has been established, carrying out service activities for more than 183 days within a twelve months period (instead of the current ongoing six months period) shall constitute a PE for DTT purposes.
Secondly, withholding tax on dividends will generally not exceed 10% and is reduced to 5% in cases in which the owning company is a corporation and holds at least 25% of the share capital of the company distributing the dividends. The reduced withholding tax rate is not available to shareholders that are partnerships or individuals.
Furthermore, the withholding tax rate on interest and royalty payments will remain unchanged at a maximum of 10%. In divergence from the usual German treaty position, these payments may be taxed in the state of the recipient or beneficial owner because the new DTT allows both parties to the agreement to charge taxes on such payments. China avoids a double taxation of interest and royalty payments by granting a tax credit whereas Germany exempts such payments from taxation.
The exact wording of the contract can be found on the homepage of the Federal Ministry of Finance in German, English and Chinese.
We recommend reviewing your existing structure in light of the new DTT rules.