On March 28, 2014, China and Germany signed a new double tax treaty (“the Treaty”) that will replace the current treaty of 1985. The ratification procedures are still pending, and the Treaty has not yet entered into force.

The Treaty makes the following favorable changes for China  inbound investments from Germany:

  • Withholding tax on dividends paid by a Chinese company to a direct German parent company (other than a partnership) holding at least 25% of the Chinese company’s equity and which is the beneficial owner of the dividends, or vice versa, is reduced from 10% to 5%. The Treaty provides a 15% withholding tax if dividends  are paid out of income  or gains derived directly or indirectly from immovable property by an investment vehicle which distributes most of this income or gains annually and whose income or gains from such immovable property is exempted from tax . 10% withholding tax rate applies in all other cases.
  • 10% withholding tax on interest (subject to exceptions) remains.
  • 10% withholding tax on royalties remains, except for royalties for industrial, commercial or scientific equipment, which are subject to 6% tax (instead of 7% tax as provided in the current treaty of 1985).
  • Concerning taxation on capital gains for the transfer of shares, and contrary to the current treaty of 1985, the general rule is that only the state of the alienator can subject them to tax, unless:
    • The shares derives more than 50% of their value directly or indirectly from immovable property located in the other contracting state, or
    • At any time during the 12 months before the disposal, the transferor
      held, directly or indirectly, at least 25% stake in the company of the
      other contracting state. Nonetheless, this provision does not apply if
      these are shares in which there is substantial and regular trading on a recognized stock exchange and the total shares transferred during the tax year does not exceed 3% of the quoted shares.
  • The minimum period to create a work-site permanent establishment is
    increased from 6 to 12 months, and for the service permanent
    establishment, the 6 months have been substituted by 183 days, in any
    period of twelve months.

Date of issue: March 28, 2014.