On 26 November 2013, China and France signed a new double tax treaty (“New France Treaty”) that will replace the existing treaty signed on 30 May 1984. The ratification procedures are pending and no official entry date has been disclosed.
Similar to the changes in other tax treaties7 re-negotiated by China in recent years, the New France Treaty incorporates the following changes:
- The New France Treaty has reduced the applicable tax rate on dividends from 10% to 5%, provided the recipient of the dividend is a corporate shareholder who holds at least 25% of the shares in the distributing company. For all other shareholders, the applicable tax rate continues to be 10%.
- The New France Treaty changes the period of time under which certain types of presences create a permanent establishment (“PE”). The period of time to create a project PE has been increased from 6 months to 12 months and a service PE from 6 months to 183 days.
- The New France Treaty contains additional provisions to deny preferential withholding tax rates on dividends, royalties and interest if the main purpose test is not met. The main purpose test states that withholding tax reductions should not be granted if the main purpose or one of the main purposes for paying the dividend, interest or royalty payments to a recipient in the treaty partner state was to take advantage of the treaty benefits.
- The New France Treaty includes an additional provision allowing the application of domestic anti-avoidance rules.
From these changes, we can see that the source country’s taxing rights have been restricted. Meanwhile, the changes also show China is intensifying its review and adjustments of tax arrangements that it considers to be an improper use of tax treaties.