China: China And Germany Signed A New Tax Treaty

Last Updated: 17 June 2014
Article by Peter Ng, Edwin Wong and Charles Lee

In brief

On 28 March 2014, China and Germany entered into a new double taxation agreement (DTA) and protocol (together referred to as 'the new DTA'). The new DTA results in an extensive revision of the currently applicable treaty signed in 1985 (1985 DTA). The key changes include extending the time threshold of construction permanent establishment (PE) from six months to 12 months, reducing the withholding tax rate on dividends to 5%, as well as revamping taxing rights on capital gains. The new DTA is also designed to prevent granting of benefits in treaty abuse cases. If diplomatic procedures are completed by both sides within 2014, the new DTA could apply to income derived on or after 1 January 2015 at earliest.

In detail

The distinctive features of the new DTA are highlighted below.

PE policy adjusted

  • The time threshold for a building site, construction, assembly or installation project to constitute a PE is extended from six months to 12 months.
  • The time threshold for constituting a service PE is changed from six months to 183 days within any 12- month period. This offers a clearer and convenient approach to count the days in the determination of a service PE.
  • The application of the independent agent exemption is further refined according to the United Nations Model Double Taxation Convention. The revised clause states that an agent who is devoting its activities wholly or almost wholly on behalf of an enterprise would be considered to be a dependent agent of that enterprise if the arm's- length relationship is absent between the agent and the enterprise.

Coverage of international transportation income elaborated

The new DTA clarifies that profit from the operation of ships or aircrafts in international traffic also includes rental on a bare-boat basis of ships or aircrafts and the use of containers if such use or rental is incidental to the operation of ships or aircrafts in international traffic. In that respect, such profit is taxable only in the country of residence. Please note that China's State Administration of Taxation (SAT) has expressed its view in the interpretation of the China/Singapore DTA that for such income to be regarded as incidental, it should generally not exceed 10% of the total income of the enterprise.1

Withholding income tax (WHT) rates reduced

  • The WHT rate for dividends is reduced from 10% to 5% if the beneficial owner of the dividends is a company which directly holds at least 25% of the capital of the company paying the dividends.

    However, the restricted WHT rate for dividends paid out of income or gains derived directly or indirectly from immovable properties by an investment vehicle in certain circumstances2 is increased to 15%. Such change will not affect German residents who receive dividends from China as the 10% domestic rate would still apply.
  • 10% WHT rate remains on interest. However, interests paid to certain Chinese state-owned commercial banks will no longer be exempted from German tax under the new DTA.
  • The restricted WHT rate on royalties paid for the use of equipment is reduced from 7% to 6%.

Capital gains provision Revamped

The 1985 DTA applies source taxation for most capital gains. The new DTA offers more reliefs as compared with the 1985 DTA. For example, the 1985 DTA allows source taxation on gains arising from all share transfers, while under the new DTA, if a German resident transfers shares in relation to China, China can only tax such gains when one of the following circumstances is met:

  1. the gains are from the disposal of shares of a property-rich company3, or
  2. the recipient of gains has a participation, directly or indirectly, of at least 25% in the capital of that company at any time during the 12-month period preceding such alienation.

In addition, regular trade of listed shares of a non-property-rich company on a recognised stock exchange are exempted from such source taxation as long as the total shares transferred in one year does not exceed 3% of the quoted shares.

Anti-treaty abuse provisions Added

An anti-treaty abuse article is inserted in the new DTA to deny treaty benefits on arrangements or transactions entered into mainly for the purpose of obtaining such benefits. In addition, it allows China and Germany to apply their domestic laws to prevent treaty abuse. This article is in line with the suggestions included in the Organisation of Economic Co- operation and Development Discussion Draft on Base Erosion and Profit Shifting (BEPS) Action 6 - prevent treaty abuse.4 The newly added article also allows taxpayers, who consider the application of the anti-avoidance provision has resulted in them not being taxed in accordance with the treaty, to resort to Mutual Agreement Procedure (MAP).

Tax sparing benefit no longer Available

The 1985 DTA has a tax sparing clause which allows German tax residents to get a 'deemed China tax credit' of 15% for interest and royalties regardless of what was actually paid. However, under the new DTA, only tax actually paid in China can be credited.

The takeaway

The new DTA between China and Germany revises some tax allocation principles which could affect taxpayers who have cross-border business between the two countries.

The restricted WHT rate in the new DTA for dividends is decreased from 10% to 5%, which is a long-awaited welcomed change aligning Germany with other European countries, e.g. France, UK, the Netherlands, Denmark, Switzerland, etc.5 Technically, the 5% WHT rate would apply to dividends paid on or after 1 January of the next calendar year following the year in which the new DTA enters into force, even though the dividends are from the profits earned in previous years. If there are any disputes with the tax authorities in this regard, taxpayers may consider the relevant dispute resolution mechanism including MAP to secure their entitlement to the legitimate treaty benefit.

In addition, the new DTA incorporates quite a number of anti-treaty abuse elements, which reflects the determination of both countries to enhance cooperation and tackle aggressive tax planning for treaty benefits. It is recommended that relevant parties should assess their current structures and arrangements and remain vigilant with regards to meeting the eligibility requirements for treaty benefits. Meanwhile sufficient documents should be put in place to withstand any possible challenges in the future.


1. Circular Guoshuifa [2010] No.75 issued by the SAT provides interpretations on the DTA concluded between China and Singapore. The Circular clarifies that the interpretations therein are also applicable to other DTAs China has concluded if the provisions of the relevant articles are the same as those in the China/Singapore DTA.

2. It refers to an investment vehicle which distributes most of the income or gains derived from such immovable properties annually and whose income or gains from such immovable properties is exempted from tax.

3. A property-rich company refers to a company deriving more than 50% of its value, directly or indirectly, from immovable properties situated in China.

4. For more information about BEPS, please refer to our News Flash [2013] Issue 17 available at axlibrary_chinatax.html

5. The restricted WHT rate is 5% in the revised DTAs between China and these European countries.

Reprinted with the permission of PricewaterhouseCoopers Consultants (Shenzhen) Ltd.,a PRC incorporated entity. Copyright 2014 PricewaterhouseCoopers Consultants (Shenzhen) Ltd. All rights reserved. The information in this article, which was assembled on the date specified in the article and based on the laws enforceable and information available at that time, is of a general nature only and readers should obtain advice specific to their circumstances from their professional advisors.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions