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Understanding the UK-China Double Taxation Agreement (DTA)

Published by Shailesh Sapkota
Posted Date: July 1, 2024 , Modified Date: July 9, 2024

The UK and China Double Taxation Agreement (DTA) was initially signed on June 27, 2011, and was subsequently amended by a Protocol signed on February 27, 2013. This agreement and its amending Protocol officially came into force on December 13, 2013.

This article aims to provide an overview of these agreements and to delineate their primary implications.

The agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China aims for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains.

Scope and Application

The first two articles in the Agreement outline the scope and applicability of its provisions, detailing the persons and types of taxes it covers. Specifically, they define who is affected by the Agreement and the various taxes that fall under its guidelines.

Article 1: Persons Covered

This agreement, signed between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China, is designed to address the issue of double taxation concerning taxes on income. It primarily focuses on individuals who are residents of either or both Contracting States.

Article 2: Taxes Covered

The scope of this agreement extends to taxes on income and on capital imposed on behalf of a Contracting State, irrespective of the way they are levied. It includes all taxes on total income or parts of income, such as gains from selling movable or immovable property.

taxes-covered

Specifically, the taxes covered are individual income tax, enterprise income tax ("China tax") in China and income tax, corporation tax, and capital gains tax ("United Kingdom tax") in the United Kingdom. The Agreement also extends to any similar taxes introduced after its signing, whether they replace or supplement the existing taxes. The tax authorities of both Contracting States will notify each other of any major changes in their tax laws.

Article 3: General Definitions

This article provides crucial definitions for interpreting the agreement:

  • It defines “United Kingdom” to mean Great Britain and Northern Ireland and the areas outside the territorial sea over which they exercise sovereign rights or jurisdiction in accordance with their domestic law and international law.
  • “China” refers to the People’s Republic of China as well as its territorial sea and the area beyond the territorial sea adjacent thereto in accordance with international law.
  • “A Contracting State” and “the other Contracting State” mean China or the United Kingdom, based on the context.
  • “Person” includes an individual, a company or any other body of persons.
  • “Company” refers to any body corporate or any entity that is treated as a body corporate for tax purposes.
  • “Enterprise of a Contracting State” and “enterprise of the other Contracting State” refer respectively to an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State.
  • The term “international traffic” means any transport by a ship or aircraft,
  • “Competent authority" is designated as the Commissioners for Her Majesty’s Revenue and Customs in the United Kingdom and the State Administration of Taxation in China or their respective authorised representatives.
  • The term “national” refers to:
  • In China: Any individual with Chinese nationality and any entity recognised by Chinese law.
  • In the United Kingdom: Any British citizen, British subject without order, or Commonwealth citizen with the right of abode in the UK, and any entity recognised by UK law.

It's also noted that any undefined terms within the agreement should be interpreted based on their meanings in the domestic tax laws of the respective party, with the tax laws taking precedence over other laws.

Residency Status

Article 4: Resident

This agreement refers to the “resident of a Contracting State” as the person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management or incorporation, or any criterion of a similar nature. However, it excludes those who are liable to tax in that Contracting State in respect of only income or capital gains from sources in that State.

Whereby if an individual is a resident of both Contracting States, he will be considered a resident only of the Contracting State where he has a permanent home. Given that he has a permanent home available to him in both Contracting States, the centre of vital interest test will determine his status. If this test is inconclusive, or if he does not have a permanent home available to him in either Contracting State, he will be a resident of the Contracting State in which he has a habitual abode. If he has a habitual mode in both States or in neither of them, he shall be deemed to be resident only of the State of which he is a national. If he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

If a person other than the individual is a resident of both Contracting States, it shall be resident only of the State in which its place of effective management is situated.

Article 5: Permanent Establishment

This article clarifies the term “permanent establishment” as the fixed place of business through which the business of an enterprise is wholly or partly operated.

The permanent establishment includes places like management offices, branches, factories, offices, workshops and extraction sites. A building site or construction project only counts if it lasts over 12 months. The provision of services, including consultancy, by an enterprise through its employees or personnel is considered only if these activities continue within a Contracting State for more than 183 days within any twelve-month period related to the fiscal year.

Exceptions to this are places used solely for storage, display, delivery, stock maintenance, purchasing goods, or preparatory activities unless they are part of a cohesive business operation by the enterprise or a closely related enterprise.

A business is considered to have a permanent establishment in a state if a person, excluding an independent agent, acts on its behalf with the authority to conclude contracts there unless the activities are limited to those that wouldn't establish a permanent place of business. Independent agents don't create a permanent establishment unless their activities are primarily for that business and differ from standard independent relations. Control by one company over another does not automatically create a permanent establishment.

Specific Tax Provisions

Article 6: Income from Immovable Property

Article 6 addresses the taxation on income derived from immovable property by the residents of a Contracting State. The term “immovable property” has the same meaning as it has under the law of the Contracting State where the property is situated. It includes property accessories, livestock and equipment used in agriculture and forestry, rights related to land property, etc. However, ships, boats and aircraft are not regarded as immovable property.

This applies to all persons, including individuals and enterprises, who derive income from the direct use, letting or use in any other form of immovable property.

Article 7: Business Profits

The applicability of tax on the profits of an enterprise is explored in Article 7 of the Agreement. As per Article 7, such profits shall be taxable only in that Contracting State where the profit is generated. However, where the enterprise carries on business in the other Contracting State through a permanent establishment, the profits that are attributable to the permanent establishment may be taxed in that other Contracting State.

Business-profits

Profits should be determined as if the permanent establishment were an independent entity. Deductions for business expenses are allowed, and profits are to be determined consistently year by year unless there's a valid reason to change. Profits from merely purchasing goods are not attributed to the permanent establishment. If specific income or capital gains are covered in other Articles, those provisions apply instead.

Article 8: International Shipping and Air Transport

Article 8 addresses the taxation of an enterprise's earnings on international shipping and air transport.

Such profits are only taxable in the Contracting State in which the income is generated. For this article, the profits include,

  • Profits from rental on a bareboat basis of ships or aircraft and
  • Profits from the use, maintenance or rental of containers used for the transport of goods or merchandise.

This Agreement does not change the existing China-UK Agreement on Avoiding Double Taxation for Air Transport Business Revenues from 1981. However, if this Agreement provides greater tax relief, that provision will apply.

Article 9: Associated Enterprises

This provision covers the enterprises controlled by other enterprises residing in different Contracting States.

If an enterprise in one Contracting State is involved in the management, control, or capital of an enterprise in another Contracting State, or if the same people are involved in both, and they set conditions between the enterprises that differ from those between independent enterprises, any resulting profits that should have accrued to one enterprise but did not due to these conditions can be included and taxed as profits of that enterprise.

If one Contracting State taxes profits that would have accrued to its enterprise under independent conditions but were taxed by the other Contracting State, the other Contracting State must adjust the tax amount accordingly. This adjustment should consider the agreement's provisions, and the Contracting States' authorities should consult if needed.

Article 10: Dividends

Dividends paid by a company in one Contracting State to a resident of another State are generally taxed in the resident's State. However, dividends paid by a company in one Contracting State can also be taxed in that Contracting State based on its laws, but if the beneficial owner is a resident of the other Contracting State, the tax charged shall not exceed:

a)

5% if the owner is a company holding at least 25% of the paying company's capital,

b)

15% if dividends come from property income/gains distributed by an investment vehicle,

c)

10% in other cases.

Authorities will agree on applying these limits. This does not affect the company's taxation on profits used to pay dividends.

Dividends from a company in one state to a resident of the other state are taxable only in the recipient's state if the beneficial owner is the government or a government-owned entity. This excludes cases where the owner has a permanent establishment in the paying company's state. The other state can't tax these dividends unless they're connected to a local resident or establishment. This rule doesn't apply if shares were created or assigned to exploit the tax benefit.

Article 11: Interest

The taxation on the interest is dealt with in Article 11 of the document.

Interest paid from one Contracting State to a resident of the other may be taxed in the recipient's state, but also in the state where it arises, with a maximum tax rate of 10%. Interest paid to the government, its subdivisions, or certain government-related entities of the other state is exempt from tax in the source state.

The term "interest" includes income from debt-claims but excludes penalties and items treated as dividends. Provisions don't apply if the beneficial owner has a permanent establishment or fixed base in the source state, or if the debt-claim was created to exploit the tax benefit.

Article 12: Royalties

Article 12 of the agreement states the implication on the royalties received.

  • Royalties arising in a Contracting State but paid to a resident of the other Contracting State may be taxed in that other Contracting State.
  • Royalties can be taxed in the state where they arise, but if the beneficial owner is a resident of the other state, the tax charged cannot exceed 10% of the gross amount or 10% of 60% of the gross amount for royalties based on conditions.
  • “Royalties” are payments received for the use of copyrights, patents, trademarks, plans, secret formulas or processes.
  • The above provisions do not apply if the recipient of royalties, a resident of one contracting state, operates in the other state where the royalties originate through a permanent establishment or fixed base, and the royalties relate to that establishment or base. In such cases, Article 7 or 14 applies.
  • Royalties are considered to arise in a contracting state if the payer is a resident there. If the payer, whether a resident or not, has a permanent establishment or fixed base in a contracting state related to the royalties, they are considered to arise in that state.
  • If the amount of royalties paid exceeds the amount agreed upon between the payer and recipient due to a special relationship, only the agreed amount is covered by this Article. The excess remains taxable under each contracting state's laws.
  • This Article does not apply if the main purpose of creating or transferring the rights for which royalties are paid was to take advantage of this Article.

Article 13: Capital Gains

Article 13 of the Agreement covers the provisions for capital gains tax. The tax treatment of capital gains depends on various factors, such as the type of assets and the seller's residency. The provisions can be summarised as follows:

capital-gains
  • Immovable Property: If a resident of one Contracting State sells immovable property located in the other Contracting State, the gains from the sale may be taxed in that other Contracting State.
  • Movable Property: Gains from selling movable property that is part of the business property of a permanent establishment which an enterprise has in the other Contracting State may be taxed in that other Contracting State.
  • Ships and Aircraft: Gains derived by an enterprise from selling ships or aircraft operated in international traffic or from movable property related to the operation of such ships or aircraft will be taxed only in the Contracting State where the business resides.
  • Shares and Interests: Gains from selling shares that derive more than 50% of their value from immovable property in the other Contracting State can be taxed in that other Contracting State. However, if a resident of one contracting state sells shares of a company resident on the other contracting state, it may be taxed in the other Contracting State provided that at any time in the twelve months before the sale, the seller owned at least 25% of the shares of that company, either directly or indirectly.
  • Other Property: Gains from the disposal of any property not described above will only be taxed in the Contracting State where the alienator is a resident.

Article 14: Independent Personal Services

The taxation on the independent personal services provided are covered by Article 14 of this agreement. Income earned by a resident of one Contracting State from professional services or other independent activities is typically taxed only in that State. However:

  • If the individual has a fixed base regularly available to them in the other Contracting State, only income attributable to that fixed base may be taxed in that State.
  • If the individual stays in the other Contracting State for 183 days or more in any twelve-month period, only income derived from activities performed in that State may be taxed there.

"Professional services" encompass independent scientific, literary, artistic, educational, teaching, medical, legal, engineering, architectural, dental, and accounting activities.

Article 15: Income from Employment

The provisions for taxation on income from employment are covered in Article 15 of the Agreement. Under this article, the salaries, wages, and other similar remuneration derived by a resident of a Contracting State with respect to employment are taxable only in that Contracting State. However, if employment is exercised in another Contracting State, such remuneration may be taxed in that other Contracting State.

For the remuneration derived by a resident of a Contracting State from the employment exercised in the other Contracting State to be taxable only in the Contracting State where he is resident, all of the following conditions must be met:

a)

The person is in the other Contracting State for 183 days or less in any twelve-month period that overlaps with the fiscal year.

b)

The employer is not a resident of the other Contracting State.

c)

The employer does not have a permanent establishment in the other Contracting State that covers the payment.

Importantly, if a resident works on a ship or aircraft operated in international traffic (not just within the other Contracting State), their earnings will only be taxed in their first-mentioned Contracting State.

Article 16: Directors’ Fees

Article 16 clarifies the implication of tax on the fees charged by directors.

Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other Contracting State.

Other Provisions

Article 17: Artistes and Sportsmen

This article covers the tax on the income derived as an artist or sportsman, notwithstanding the provision of Article 14 and 15.

The income derived by a resident of a Contracting State as an entertainer, such as a theatre, musician, or as a sportsman, from his personal activities as such exercised in the other Contracting State, will be taxed in that other Contracting State.

If the income derived from an entertainer or a sportsman’s activities in their capacity accrues to another person other than them, that income will still be taxed in the Contracting State in which they are exercised, notwithstanding the provisions of Article 7, 14 and 15.

Article 18: Pensions

This article clarifies the tax treatment of pensions and similar remuneration. Essentially, such payments received by residents and arising in a Contracting State may be taxed in that respective Contracting State.

Article 19: Government Service

Article 19 covers the taxation on income paid by governments or related authorities to the individuals.

Remuneration, including pensions, paid by the Government of one of the Contracting States to individuals for services rendered will be exempt from tax in the other Contracting State if the individual is not a resident in the other Contracting State or is ordinarily a resident in that other Contracting State solely for the purpose of rendering those services. 

Government-service

The provisions of this paragraph shall not apply to payments in respect of services rendered in connection with any trade or business carried on by either of the Governments for purposes of profit.

Article 20: Students

Payments received by a student or business apprentice for the purpose of education and training are exempt from taxes in the Contracting State where they are studying if they were a resident of the other Contracting State, and the payments come from outside the Contracting State where they are studying.

Article 21: Other Income

Article 21 of the Agreement document specifies that income not dealt with in the previous articles, regardless of its source, is taxable only in the Contracting State of residence.

However, it does not apply to income (excluding income from immovable property) if the recipient, a resident of one Contracting State, conducts business in the other Contracting State through a permanent establishment or performs independent personal services there from a fixed base. The income must be connected with that establishment or base, in which case Article 7 or Article 14 applies.

If there's a special relationship between the resident and another person or with a third person, resulting in income exceeding what would be agreed upon without that relationship, this Article applies only to the agreed amount. Any excess income remains taxable according to each Contracting State's laws, considering other provisions of the Agreement.

This Article does not apply if the main purpose, or one of the main purposes, of any party involved in creating or assigning the rights generating the income, is to exploit this Article through such creation or assignment.

Article 22: Elimination of Double Taxation

The primary reason of the Double Taxation Agreement (DTA) is to make sure that individuals are not taxed in two separate Contracting States. Article 22 of the Agreement explains how this is worked out in both of the Contracting States.

To avoid double taxation in China:

  • China residents can deduct the income tax paid in the UK from their China tax owed in that income that may be taxed in the UK. However, the credit cannot exceed the amount of tax computed according to China’s tax laws.
  • When a UK-resident company pays dividends to a China-resident company that owns over 20% of its shares, the tax credit for the Chinese company will include the UK tax paid by the dividend-paying company on its income.

Under UK law, to avoid double taxation:

  • China tax on profits, income, or gains from China is credited against UK tax on the same income (excluding dividend tax on profits used to pay the dividend).
  • Dividends from a Chinese company to a UK company are exempt from UK tax if conditions for exemption are met.
  • For dividends not exempt under (2), paid by a Chinese company to a UK company owning at least 10% of voting power, the credit for China tax includes the company's tax on profits used to pay the dividend.
  • However, profits, income and capital gains owned by a resident of the United Kingdom, which may be taxed in China in accordance with this agreement, shall be deemed to arise from sources in China.

Article 23: Miscellaneous Rules

Nothing in this Agreement shall prejudice the right of each Contracting State to apply its domestic laws and measures concerning the prevention of tax evasion and avoidance, whether or not described as such, insofar as they do not give rise to taxation contrary to this Agreement.

Article 24: Non-Discrimination

Article 24 of the Agreement document addresses that a person, partnership, or association recognised as such under the laws of one Contracting State should not face different or more burdensome taxes or related requirements in the other Contracting State than those faced by similar entities in that other Contracting State, especially regarding residency.

Enterprises of one Contracting State, owned or controlled directly or indirectly by residents of the other Contracting State, shall not face more burdensome taxation or requirements in the first-mentioned State than similar local enterprises. This Article does not compel either Contracting State to grant non-residents any personal allowances, reliefs, or tax reductions provided to residents or nationals.

These provisions apply to taxes covered under Article 2 of the Agreement.

Article 25: Mutual Agreement Procedure

Article 25 of the agreement outlines the Mutual Agreement Procedure (MAP) for resolving taxation disputes between the involved Contracting States.

If a resident of one Contracting State believes that either State's actions result in improper taxation under the Agreement, they can appeal to their own State's competent authority. Alternatively, if the case falls under Article 24, they can approach the competent authority of the Contracting State where they are a national, regardless of local remedies.

The competent authority will strive to resolve valid objections it cannot resolve alone. This involves mutual agreement with the other Contracting State's authority to prevent non-compliant taxation, implemented despite domestic procedural limits.

Both authorities collaborate to resolve Agreement interpretation issues and handle cases of double taxation not explicitly covered. They can consult directly to resolve tax matters between the two States efficiently.

Article 26: Exchange of Information

The necessity to exchange the information between the competent authorities of two Contracting States (defined in Article 3) is addressed in Article 26 of the Double Taxation Agreement (DTA). The relevant information will be exchanged for enforcing the provisions of the agreement. The article also stresses that the information received by a Contracting State must be treated as secret, similar to domestic tax information.

Exchange-of-information

If a Contracting State requests information, the other Contracting State cannot refuse to supply it, and must use its measures to obtain it, even if it doesn't need it for its own tax purposes.

However, the Contracting States are not obligated to do the following:

  • Carry out administrative measures that violate the laws or administrative practices of either Contracting State.
  • Supply information that is not obtainable under the laws or normal administrative practices of either Contracting State.
  • Provide information that would reveal trade secrets or contravene public policy.

Article 27: Members of Diplomatic Missions and             Consular Posts

Nothing in this Agreement shall affect the fiscal privileges of members of diplomatic missions or consular posts under the general rules of international law or under the provisions of special agreements.

Article 28: Entry to Force

Article 28 outlines the procedures for the Agreement's entry into force and its effective date.

Each Contracting State will inform the other via diplomatic channels when their respective legal procedures for enacting this Agreement are complete. The Agreement will come into force on the later date of these notifications and will have the following effects:

In China:

  • Profit, Income and Capital Gains: Affects the tax year on or after January 1 in the calendar year following the Agreement’s entry to force.

In the United Kingdom:

  • Income Tax and Capital Gains Tax: Affects the assessment year starting on or after April 6 following the Agreement’s entry to force.
  • Corporation Tax: Affects the financial year starting on or after April 1 following the Agreement’s entry to force.

The Agreement between the Government of China and the Government of the United Kingdom, signed on July 26th, 1984, as amended by a protocol signed on September 2nd, 1996, will cease to apply to any taxes once this new Agreement takes effect for those taxes.

Despite the new Agreement coming into force, individuals who currently qualify for benefits under Article 21 (Teachers and Researchers) and Article 22 (Students, Apprentices, and Trainees) of the previous Agreement will retain those benefits until they would have naturally expired under the terms of the old Agreement.

Article 29: Termination

Article 29 addresses the termination of the Agreement.

As the Agreement has already commenced, the Agreement will stay in effect until one of the Contracting States decides to terminate it. Either Contracting State can end the Agreement by giving a written notice at least six months before the end of any calendar year, but only after the Agreement has been in force for five years. Upon termination, the Agreement will cease to have effect:

In China:

  • Profits, Income and Capital Gains: For any tax year starting on or after January 1st following the notice date.

In the United Kingdom:

  • Income Tax and Capital Gains Tax: For any assessment year starting on or after April 6th following the notice date.
  • Corporation Tax: For any financial year starting on or after April 1st following the notice date.

Conclusion

The Tax Information Exchange Agreement and the Double Taxation Agreement (DTA) between the UK and China is a significant step in fostering a transparent and cooperative fiscal relationship between the two Contracting States.

This not only streamlines the tax obligations for residents but also encourages trade and investment, given the clarity on tax liabilities.

As international fiscal landscapes evolve, such agreements will continue to play a vital role in navigating the complex realm of global taxation.

Shailesh Sapkota
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