The Netherlands at the forefront for Chinese outbound investment structures.

Recent Developments

On 31 May 2013 the People's Republic of China ("China") and the Netherlands have signed a new tax convention ("the new Convention") that will replace the existing double tax convention of May 13, 1987 ("the old Convention"). The ratification procedure is pending and although no official entry date has been disclosed it is expected that the new Convention will enter into force soon.


The new Convention contains several new features, which can be expected to have significant impact on investments into China and into the Netherlands. Its terms (with respect to reduced withholding tax rates on dividends, royalties and interest) are among the most preferential of the tax treaties that have been concluded by China. Although the Netherlands is already regarded one of the leading holding company jurisdictions, this new Convention will further strengthen the Netherlands' attractiveness as a holding company jurisdictions for global investments into China and Chinese investments into Europe and non-EU countries.

The new Convention may specifically bring new opportunities, with a view to avoid the loss of foreign tax credits in China for taxes paid abroad.

What The New Tax Treaty Says

Reduced Dividend Withholding Taxes

Withholding taxes on dividends paid by a Dutch company to a (direct) Chinese parent company or vice versa will be reduced to 5%, provided that the transaction meets the so-called main purpose test (see below). This is a significant improvement compared to the old Convention's 10% dividend withholding tax rate and puts the new Convention amongst the most favorable tax treaties signed by China. Most other treaties still include a 10% dividend withholding tax rate.

The already favorable conditions under the new Convention are further strengthened by the fact that dividends paid to a Dutch holding company are generally fully exempt from corporate income tax in the Netherlands provided the requirements for the Dutch participation exemption are met.

Taxation of Royalties

The Netherlands does not levy withholding tax on royalties under its domestic tax law. The new Convention reduces the Chinese royalty withholding tax rate to 6% for specific types of royalties, like the right to use industrial, commercial or scientific equipment, which also is an improvement compared to the old Convention. Other royalties may be taxed at the regular rate of 10% Chinese withholding tax. Under the old Convention, China was allowed to tax royalties at a rate of 10% on all royalties.

Favorable Treatment of Interest

The Netherlands does not levy withholding tax on interest under its domestic tax law. The new Convention limits any potential Chinese interest withholding tax levied on basis of Chinese domestic laws to a maximum rate of 10%, which is considered favorable in comparison with other tax treaties.

Anti-avoidance and Main Purpose Test

The new Convention contains a provision that seeks to disallow the benefits of the treaty with respect to withholding taxes on dividends, royalties and interest, if the so-called main purpose test is not met. This main purpose test states that the respective withholding tax reductions shall not apply, if the creation of the dividend, interest or royalty payments was mainly focused on taking advantage of the respective articles.

Favorable Treatment of Capital Gains

China aims to levy tax on capital gains derived from the (direct and indirect) disposal of shares in a Chinese resident company by foreign investors in China. This has led to a pattern of source state tax provisions in most recent tax treaties negotiated by China. Similarly, the new Convention also allows China to effectuate their domestic capital gains tax rules, provided the Dutch (direct or indirect) shareholder owns at least 25% of the shares in the Chinese disposed subsidiary. Nevertheless, the sale of shares in listed companies is being exempt from Chinese source state capital gains taxation.

Exchange of Information and Mutual Agreement Procedure

The new Convention contains a provision on the exchange of information between the competent tax authorities as well as a Mutual Agreement Procedure comparable with the old Convention, which are both based on the OECD Model Tax Convention.


The new Convention offers advantages to many investors. If you are interested in setting up a tax optimized investment structure or in restructuring your already existing investment structure in order to optimize it from a tax perspective, please contact us. For instance to optimize your current structure with a view to increase your Chinese foreign tax credits for taxes paid abroad, since the new Convention may no longer require an additional layer between China and the Netherlands. A single Dutch holding company for your international expansion may suffice under the new Convention.