The Dutch State Secretary of Finance signed a new tax treaty (including protocol) with China on 31 May. The 2013 Treaty is generally based on a mixture of the 2005 - 2010 OECD Model Tax Conventions and the 2001 - 2011 UN Model Tax Conventions, with the following key features:
- Residency - a person is eligible for the benefits of the Treaty if it is liable to tax in a Contracting State; a tax exempt investment institution shall not be entitled to the benefits of the 2013 Treaty.
- Permanent establishment - the scope of the permanent establishment article is extended in that the provision of services by an enterprise through employees or other personnel engaged by the enterprise for such purpose may be deemed to constitute a permanent establishment if such activities continue within a Contracting State for a period or periods aggregating more than 183 days within any twelve-month period.
- Dividends - the tax rate in respect of dividends is under all circumstances limited to 10%, provided the recipient of such dividends is the beneficial owner of the dividends; however, such rate may be further reduced to 5%, again provided the recipient is the beneficial owner of the dividends, and provided further such recipient holds a direct interest of at least 25% of the capital in the distributing company.
- Interest - the tax rate in respect of interest is reduced to 10%, and such rate may be further reduced to 0% if the beneficial owner of the dividends is the Government, a Central Bank or a financial institution the capital of which is directly or indirectly wholly owned by the other Contracting State.
- Royalties - the tax rate in respect of royalties is reduced to 10%, and such rate may be reduced to 6% if the royalties are paid in consideration for the use of, or right to use, industrial, commercial or scientific equipment.
- Capital gains - if a Dutch resident person realizes a capital gain in respect of the disposal of shares in a Chinese resident company, such gain is only taxable in China if these shares derive more than 50% of their value directly or indirectly from immovable property located in China; or the Dutch resident person at any time during the twelve-month period preceding the share disposal directly or indirectly held a participation of at least 25% in the Chinese resident company.
Compared to the 1987 Treaty, the 2013 Treaty significantly improves the position of investors with respect to protection from dividend tax through the introduction of the reduced 5% rate which is the lowest rate provided for under Chinese tax treaties and capital gains tax in respect of share disposals.