As more of our businesses venture into China there would be interest to know what some of the significant changes are in the new treaty. The previous Agreement for the Avoidance of Double Taxation Agreement (DTA) between Singapore and China was signed in April 1986 and came into force on 12 December 1986. The new agreement was signed on 11 July 2007 and came into force on 18 September 2007.
Under the revised treaty the dividend withholding tax rate is reduced from 7% to 5% if the beneficial owner of the dividends is a company that holds at least 25% of the capital of the company paying the dividend. In all other cases the rate of withholding is 10%, down from 12%. The 5% withholding rate is amongst the most favourable rate found in China’s other DTAs. It is lower than the 10% Chinese domestic withholding tax rate.
For royalties the new treaty offers a reduced tax rate of 6% on payments for the use of or the right to use any industrial, commercial and scientific equipment. This reduced rate can help boost leasing of assets from Singapore into China.
In respect of interest the withholding rate remains at 10%. For banks and financial institutions the rate is 7%, but for Government it is exempt.
In the new treaty a new anti-avoidance provision has been added to the dividend, interest and royalties articles individually. In it is stated that the provisions of the articles shall not be applicable if the main purpose of the person in creating or assigning the shares or other rights of which dividend is paid, or debt claim in respect of which interest is paid, or rights in respect of which royalty is paid, is to take advantage of the said articles.
The protocol provides that the term “body of persons” will include a trust established in a State if the domestic law of the State regards the trust as a resident of that State. This means a business trust may be recognized as a resident under the new treaty.
In determining the residence of an individual he shall be deemed to be a resident of a State if he has a permanent home, a habitual abode and, if he has a habitual abode in both States he shall be deemed to be a resident of that State of which he is a national. For a company it is resident of that State in which its effective management is situated.
The tax sparring provision is now less specific in formulation. For credit against Singapore tax payable by the Singapore resident, the Chinese tax payable on that income shall be deemed to include the amount of Chinese tax that would have been paid if not for the exemption under the domestic Chinese tax laws.
Alan Ow
KhatterWong