On 25 May 2010, Finland and China (People's Rep.) signed a new double tax treaty and protocol in Beijing. The governmental bill was sent to the Finnish Parliament for approval on 16 July 2010. Once in force, the new treaty will replace the Finland-China income tax treaty of 12 May 1986 as amended by the 1995 protocol. Although the new treaty generally follows the 2008 OECD Model Convention, some provisions of the new treaty could have effect on structuring business activities between Finland and China. The main amendments are reported in the following.
In the new treaty the maximum rate of withholding tax on dividends is reduced to 5% if the parent company receiving the dividends holds directly at least 25% of the capital of the company paying the dividends. Currently the withholding tax rate is 10% and consequently the new provision will benefit Finnish companies having Chinese subsidiaries as the Chinese withholding tax has been a final burden to Finnish parent companies. Also the Finnish withholding tax rate on Finnish-source dividends to Chinese parent companies is reduced accordingly.
In addition Finland will abolish the so-called tax sparing provision according to which a fictive withholding tax has been credited in Finland on Chinese-source dividends, interests and royalties. The abolition could increase the total tax burden of Finnish entities receiving income from China.
The new treaty also expands the definition of permanent establishment (PE) with regard to insurance enterprises which are deemed to have PE in the other contracting state if they collect premiums in the territory of that other state or insures risks situated therein through a person other than an agent of an independent status.
According to new treaty provisions gains derived by a resident of a contracting state from the alienation of shares in a company which is a resident of the other contracting state may be taxed in the other state if the recipient of the gain, at any time during the 12-month period preceding such alienation, had directly or indirectly a participation of at least 25% in the capital of that company. The provision could have effect on Finnish parent companies selling shares in Chinese subsidiaries as it expands the taxing right of China to certain capital gains. The provision will not have effect on alienation of shares in Finnish companies.
The new treaty is expected to enter into force during autumn 2010 and have effect on income derived on or after 1 January 2011 provided that both countries complete their domestic implementation procedures in time.
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