China: Enter the dragon: strengthening ties between China and the United Kingdom

Last Updated: 3 June 2014
Article by Heather Corben and Tony Dong

The UK government has made clear its ambition to improve economic links with China and to make it easier for business to be done between the two countries. Recent initiatives have included the relaxation of visa requirements for Chinese visitors to the UK, George Osborne's trade trip to China in October 2013, and David Cameron's visit in December with a 100-strong trade delegation. According to China's ambassador to Britain, trade between the two countries surpassed £42.5 billion in 2013. A further sign of the UK government's enthusiasm is the new comprehensive double taxation agreement (DTA) between the UK and China.

The DTA takes effect in China in relation to income and gains arising in tax years beginning on or after 1 January 2014. In the UK, it takes effect from 6 April 2014 in relation to income and capital gains tax and from 1 April 2014 for corporation tax. The new DTA is largely consistent with the OECD Model Double Tax Convention. The previous treaty, which dated from 1984, did not include provisions found in more modern agreements, such as a detailed exchange of information provision.

Although the new treaty was signed in June 2011, implementation was delayed because of a particular concern of the Chinese government in relation to withholding tax on dividends, as explained below. China approached the UK to request a change to these provisions, and the protocol amending the 2011 treaty was signed in Beijing on 27 February 2013.

Dividend withholding tax

The dividend withholding tax rate under the previous treaty was 10%. Importantly for UK residents investing in China, the new DTA imposes a maximum dividend withholding tax of 5% for corporate investors beneficially owning at least 25% of the capital of the dividend-paying company, and a 10% withholding tax rate in other cases.

The treaty signed in June 2011 permitted indirect holdings, as well as direct holdings, to be taken into account in reaching the 25% beneficial ownership threshold required to benefit from the reduced 5% withholding tax rate.

However, China had concerns about the inclusion of indirect holdings for these purposes, and, after the requested Chinese revisions, the 5% withholding tax rate now applies only where the 25% is held directly.

The reduction in withholding tax rates to 5% and 10% are important for UK residents investing in China, but is perhaps not so significant for investment flowing in the opposite direction. Under current UK law, there is generally no withholding tax on dividends, so Chinese residents investing in the UK would not suffer withholding tax on dividends in any event.

The UK does impose a 20% withholding tax on property income distributions paid by real estate investment trusts and property authorised investment funds. The reduced 5% and the 10% withholding tax rates set out above would not apply to such distributions. The DTA contains a specific provision imposing a maximum withholding tax of 15% where:

  • the dividends are paid out of income or gains derived directly or indirectly from immovable property;
  • the investment vehicle distributes most of this income or gains annually; and
  • the investment vehicle's income or gains from such immovable property is exempted from tax.

Chinese residents receiving property income distributions from a UK real estate investment trust (REIT) or property authorised investment fund (PAIF) will therefore suffer withholding tax at a rate of 15% rather than 20%.

Withholding tax on interest and royalties

No change has been made in the DTA to the maximum withholding tax on payments of interest, which remains at 10%.

There has been a minor reduction, from 7% to 6%, in the amount of withholding tax on royalties from the use of, or right to use, industrial, commercial or scientific equipment.

Table 1 sets out the key changes to withholding tax on various types of income.

Capital gains

For UK residents seeking to invest in China, another key benefit of the new DTA is the complete relief from tax on capital gains when disposing of holdings of less than

25% in Chinese companies, although this does not apply to shares in property-rich companies. Previously, capital gains on the disposal of shares in China were subject

to withholding tax at 10% because the 1984 treaty did not exclude any gains on the disposal of Chinese shares from the imposition of tax in China.

Technical fees

The 1984 treaty permitted the charging of a 7% withholding tax on technical fees, regardless of whether the technical, supervisory or consultancy services provided had created a permanent establishment. The new DTA no longer includes an Article on technical fees but instead includes within the definition of a permanent establishment the furnishing of services by an enterprise through employees or other personnel. This applies where the provision of services is for more than 183 days in a 12-month period.

While at first glance this does not seem more generous than the permanent establishment test of 'six months in a 12-month period' that appears in many of China's treaties with other countries, the test in the UK–China DTA is more helpful. Local tax authorities in China have, in practice, applied the 'six months' test by counting one day's presence in a month as a whole month; this can significantly increase the permanent establishment risk even if the actual length of stay in China is limited. The precision in the drafting of the '183 days' test is therefore welcome. The abolition of the technical fees article and the introduction of the service's permanent establishment provision provide more certainty for UK enterprises providing services in China by reducing the risk of creating a permanent establishment.


Compared with the rest of China's current treaty network, the UK–China DTA provides the most favourable treaty benefits that apply only to a small group of countries and territories, including Hong Kong, Singapore, Ireland, Luxembourg, Sweden, Barbados and Mauritius. Taking this together with the generous UK regime involving no withholding tax on dividends, (normally) no tax on capital gains for non-residents, and interest deductions on loans financing foreign equity investments (subject to certain limits), the UK may now be regarded as a very competitive jurisdiction for both Chinese investment into the EU and investment from EU countries into China. A Chinese investor can, by establishing a UK resident holding company, benefit from EU nondiscrimination principles, the Parent-Subsidiary Directive, the Merger Directive and the Interest and Royalty Directive within the EU. In addition, a UK holding company would not be caught by China's controlled foreign company (CFC) rules because the UK is a white list territory, although the UK's own CFC rules would need to be considered if it is used as a holding company jurisdiction. Further advantages of establishing a UK holding company in these circumstances include the exemption from UK corporation tax for a UK holding company on profits from the disposal of shares in its subsidiaries. This is provided that the conditions for the substantial shareholding exemption to be satisfied are fulfilled and a broad exemption from corporation tax for distributions received (again subject to certain conditions) from both UK and non-UK companies, whether inside or outside the EU. The UK tax resident company can also benefit from an exemption from UK tax on profits attributable to a non-UK permanent establishment.


The long-awaited entry into force of the UK–China DTA is welcome not only for UK companies looking to invest in China, but also in making UK holding companies attractive for both inbound and outbound investment flows between China and the EU. The increased tax efficiency represents an important step in the UK government's drive to encourage cross-border trade and investment with China.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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”

Related Topics
Related Articles
Related Video
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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