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FINANCE: Double Taxation Agreements. Interpretation Updated
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Double Taxation Agreements: Interpretation Updated
By Kelvin Lee, PwC Tianjin

cyprus double taxation avoidance agreements dtaa 编辑      为了统一和规范我国政府对外签署的避免双重征税协定(简称“税收协定”)的执行,进一步完善税收协定中“常设机构”,“海运和空运”,“演艺人员和运动员条款”以及“合伙企业适用税收协定”的规则,2018年2月9日,国家税务总局发布了《关于税收协定中执行若干问题的公告》(国家税务总局公告2018年第11号,以下简称“11号公告”),适用于2018年4月1日及以后发生纳税义务或扣缴义务需要适用税收协定相关条款的事项。首先,在常设机构条款有关问题方面,公告明确,不具有法人资格的中外合作办学机构,以及中外合作办学项目中开展教育教学活动的场所构成税收协定缔约对方居民在中国的常设机构。公告同时明确,常设机构条款中关于劳务活动构成常设机构的表述为:“在任何十二个月中连续或累计超过六个月”的,按照“在任何十二个月中连续或累计超过183天”的表述执行。其次,在海运和空运条款方面,重新定义了“从事国际运输业务取得的收入”。11号公告中“从事国际运输业务取得的收入”的定义明确以程租、期租形式出租船舶或以湿租形式出租飞机(包括所有设备、人员及供应)的租赁收入属于国际运输业务收入。

      11号公告还指出,企业从事以光租形式出租船舶或以干租形式出租飞机,以及使用、保存或出租用于运输货物或商品的集装箱等租赁业务取得的收入不属于国际运输收入,但根据中新税收协定第八条第四款,附属于国际运输业务的上述租赁业务收入应视同国际运输收入处理。

      第三,在演艺人员和运动员条款方面,明确了“会议发言”不属于演艺人员活动,官方解读中也进一步举例说明了会议发言的范围,如“外国前政要应邀来华参加学术会议并发言不属于演艺人员活动”。与此同时,公告将参加“电子竞技”运动纳入运动员活动的范围。此外,还明确在演艺人员或运动员直接或间接取得所得或演出活动产生的所得由其他人收取的情况下,需依据税收协定和缔约国国内法确定征税权。

      最后,在合伙企业适用税收协定问题方面,如果合伙人为税收协定缔约对方居民,则该合伙人属于税收协定适用的范围,该合伙人在中国负有纳税义务的所得被缔约对方视为其居民取得的部分,可以享受协定待遇。依照外国(地区)法律成立的合伙企业不属于《企业所得税法》第一条规定的排除范围,应适用《企业所得税法》的规定。


      11号公告的出台为纳税人提供了具体的清晰指引,有利于企业完善税务立场,明确预计商业计划的税务影响。

Shanghai 780x520China’s current interpretation regarding the implementation of double taxation agreements (DTA) are mainly reflected in the "Notice Issued by the State Administration of Taxation (SAT) Releasing the " (Guoshuifa [2010] No. 75 or Circular 75). The interpretation in Circular 75 is also applicable to other DTAs concluded by China if the provisions of the relevant articles in those DTAs are the same as those in the China-Singapore DTA.


The SAT issued SAT Public Notice [2018] No.11 (Public Notice 11) on 9 February 2018 to update its interpretation of a few articles under DTAs concluded by China and clarify the DTA treatment of partnerships for the first time. Public Notice 11 will take effect from 1 April 2018. The major updates are as follows:


• Permanent establishment (PE) article: Clarifying that Sino-foreign cooperative education institutions/programs would constitute a PE in China; and the "6 months period” threshold for a service PE is interpreted as "183 days";

• Shipping and air transport article: Amending the scope of international transportation income;

• Artists and sportsmen article: More comprehensive interpretation of the article;

• New interpretation for DTA treatment of partnerships and partners.


Public Notice 11 may have impact on non-residents who are engaged in Sino-foreign cooperative education institutions/programs in China or provide services in China, international transportation companies, non-resident artists/sportsmen who carry out relevant activities in China and domestic/foreign partnerships and their partners who derive income from China. They are suggested to review their cross-border business models and evaluate the potential tax implications. It is also important for them to pay attention to the interpretation in Public Notice 11 that deviates from international practice as well as the unclear issues. Where necessary, they may need to come up with solutions to mitigate the potential negative impacts.

170804221933 singapore skyline file super 169Permanent establishment article


Public Notice 11 clarifies that the foreign party of a Sino-foreign cooperative education institution that is established in China without a legal person status or the establishment or place where the education activities of a Sino-foreign cooperative education program are conducted would be considered as having constituted a PE in China. Foreign parties of Sino-foreign cooperative projects in China should pay close attention to this new interpretation and review their business models in China. The relevant China corporate income tax (CIT) and individual income tax (IIT) implications may be complex.


Under the China/Singapore DTA, the term of “a period or periods aggregating more than 183 days within any 12 months” is used for the determination of a service PE. This term is also commonly used in China's newly signed DTAs over the past decade. However, in many DTAs signed by China in the early years, the determination of a service PE is based on the term of “a period or periods aggregating more than 6 months within any 12 months”. In practice, the local-level tax authorities and non-resident taxpayers often have disputes on how to calculate the 6-months period. Public Notice 11 clarifies that the Chinese tax authorities would use “183 days” to implement the term “6 months period”. This long-awaited explanation is very friendly and will be greatly welcomed by non-resident taxpayers.

BT 201803 Finance 03Shipping and air transport article


Turning to the implementation of the shipping and air transport article, it is international practice (including the commentary to Organization for Economic Co-operation and Development (OECD)’s Model Tax Convention) that international transportation income would include income from international transportation by ships/aircraft as well as income from voyage charter, time charter and wet lease of ships/aircraft. The SAT Public Notice [2014] No. 37 (Public Notice 37) also provides similar interpretation from the perspective of China’s domestic tax law.


However, Circular 75 has excluded the income from voyage charter, time charter and wet lease from the scope of international transportation income but instead classified them as income from ancillary activities. Further, Circular 75 imposed a cap of 10%, i.e. the income from ancillary activities could be eligible for the DTA benefits only if it is less than 10% of the enterprise’s gross income. The above-mentioned interpretation in Circular 75 was inconsistent with international practice.


We are pleased to see that Public Notice 11 has taken the international practice into consideration and classified the income of voyage charter, time charter and wet lease as income from international transportation eligible for the relevant DTA benefits. However, it should be noted that income from bare-boat lease, dry lease and container lease still falls within the scope of ancillary activities income, which should not exceed 10% of the total international transportation income in order to enjoy the DTA benefits. Circular 75’s interpretation regarding the shipping and air transport article will be entirely replaced by the new interpretation in Public Notice 11.


The new interpretation of Public Notice 11 is a major breakthrough for non-resident international transportation enterprises. In the future, they will no longer need to worry about whether their voyage charter, time charter and wet lease income can be eligible to DTA benefits in China as long as they properly perform record filing in accordance with Chinese tax authorities’ requirements.

BT 201803 Finance 05Artists and sportsmen article


Public Notice 11 provides more detailed guidance on the enforcement of the artists and sportsmen article under DTAs and clarifies the scope of activities covered by this article. It also elaborates on how this article shall apply to situations where the artists/sportsmen directly or indirectly derive income from China, and where such income is partially or entirely paid to other individuals or companies rather than to the artists/sportsmen. The general principle is that China has the taxing right over the relevant income from the activities taking place in China regardless of whether or not such income is actually received by the artists/sportsmen. The explanatory notes to Public Notice 11 has provided three examples (including a symphony orchestra, a case whereby the artists/sportsmen are employed by a one person company, and a tax avoidance scheme under which the income was paid to other individuals/companies instead of directly to the artists/sportsmen) in order to illustrate how this article shall be applied in real cases.


The interpretation in Public Notice 11 on this article is generally consistent with the commentary to the OECD Model Tax Convention. However, in practice when it comes to specific cases (especially for cases involving income indirectly received by artists/sportsmen from China, artists/sportsmen employed by a one person company, income partially or entirely received by other individuals or companies, etc.), the tax treatment may be quite complicated and should be dealt with by reference to various provisions under China’s CIT Law and IIT Law.

4T 201803 Finance 03DTA treatment for a partnership and its partners


Partnerships established in China


Under China’s CIT Law and IIT Law, a partnership established in China is not a taxable entity. Instead, each partner is the taxpayer in relation to the income allocated from the partnership. Public Notice 11 clarifies that, for a partnership established in China, if its partner is a tax resident of the other contracting jurisdiction, the portion of the income derived by the partner from sources in China may be eligible for the DTA benefits in China.


However, Public Notice 11 has not set out further guidance on how to assess whether or not a non-tax resident partner would have constituted a PE in China. This gives rise to uncertain issues such as whether the income earned by a non-resident partner from China is active income or passive income, and which DTA articles (e.g. permanent establishment, business profits, dividends, interest or capital gains, etc.) shall apply to such income. These issues remain to be clarified by the SAT.


Partnerships established outside China


Under China’s CIT Law (i.e. the domestic law), a partnership established outside China (“foreign partnership”) is regarded as a non-resident enterprise. Public Notice 11 clarifies the DTA treatment for a foreign partnership under the following two scenarios:


Scenario 1: If the foreign partnership is treated as a tax resident of the other contracting jurisdiction and liable to tax in that jurisdiction (i.e. the partnership is being treated as a taxable entity), then the partnership may enjoy the DTA benefits in China as a tax resident of that other contracting jurisdiction.


Scenario 2: Where income derived by a foreign partnership is treated as income earned by its partner (i.e. the partnership is being treated as a tax transparent entity) under the domestic law of the other contracting jurisdiction, the Chinese tax authorities will grant the DTA benefits to the partners of the partnership only if the DTA between China and the other contracting jurisdiction clearly stipulates that under the above-mentioned circumstances, the partners who are tax residents of the other contracting jurisdiction may enjoy the relevant DTA benefits. According to the wording of Public Notice 11, it seems that under Scenario 2, only partners who are tax residents of the same jurisdiction as the partnership can enjoy the DTA benefits in China. In other words, partners who are tax residents of a third tax jurisdiction are not eligible for the DTA benefits in China.


The interpretation for Scenario 1 provided in Public Notice 11 (where the partnership is treated as a taxable entity in the other contracting jurisdiction) is consistent with international practice and is generally accepted by tax authorities and taxpayers in most jurisdictions.


However, the interpretation for Scenario 2 provided in Public Notice 11 (where the partnership is treated as a tax transparent entity in the other contracting jurisdiction) is very stringent. So far, amongst more than 100 DTAs entered into by China, only the DTA with France explicitly states that, for a partnership established in France and treated as a tax transparent entity in France, the partners who are French tax residents may enjoy the relevant DTA benefits under the China/France DTA. In other words, for a partnership that is established in a jurisdiction other than France and regarded as a tax transparent entity in that jurisdiction, neither the partnership nor its partners can enjoy any DTA benefit in China.

Agreement 825x510The takeaway


Circular 75 has been in force for more than seven years. The updated interpretation on DTA treatment stated in Public Notice 11 is pretty significant. It is expected that it will have a widespread impact on tax residents from all DTA jurisdictions.


It is worth noting that the DTA treatment of foreign partnerships has long been an uncertain issue. It appears that the interpretation in Public Notice 11 has completely closed the window for any foreign partnership or its partners to enjoy China’s DTA benefits if the partnership is regarded as a tax transparent entity in its home jurisdiction (unless otherwise specifically stipulated in the relevant DTAs). Although most of the DTAs concluded by China do not contain a provision regarding the DTA treatment of a partnership, it is generally accepted internationally that when a partnership is treated as a tax transparent entity in its home jurisdiction, its partner shall be allowed to enjoy the DTA benefits. As such, the interpretation of Public Notice 11 is apparently too strict and deviates from the international practice. It remains to be seen how other DTA jurisdictions will react to China’s interpretation and practice in this respect.

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