China: The Application Of Article 9 (Capital Gain) Under The MLI To Covered Tax Agreements (Part II)

Last Updated: 7 June 2019
Article by Alfred Chan

This is the second part of the Article entitled "Analysis on the Application of Capital Gain Article under the MLI to Covered Tax Agreements"

Article 9(1) of the MLI - Capital Gains from Alienation of Shares or Interests of Entities Deriving their Value Principally from Immovable Property - provides that contracting jurisdictions shall both adopt the 365-day holding period requirement for shares from the alienation of which gains arise and expand the scope of gains from the alienation of shares to comparable interests including that in partnership or trust.

The Differing MLI Positions on Article 9

To illustrate how Article 9 works in practice, Table 1 shows some selected contracting jurisdictions (one signatory and eight parties) [1] of the MLI that have exercised options under Article 9 of the MLI as of 9th April 2019, using information from the MLI database's matrix of options and reservations, as provided by the OECD depositary.

Table 1 – Reservation (opt-out provision) under Article 9(1)

Reservations (Opt-out provision) under Article 9

  • Pursuant to Article 9(6)(a), Isle of Man, Israel, Malta, Singapore, and the U.K. all reserve the right not to apply Article 9(1) to their respective CTAs.
  • Pursuant to Article 9(6)(b), China reserves its right not to apply the holding period as provided under Article 9(1)(a) to its CTAs.
  • None of the selected contracting jurisdictions make reservations under Article 9(6)(c) and Article 9(6)(d).
  • Pursuant to Article 9(6)(e), Australia reserves its right for Article 9(1)(b) not to apply to its CTAs that provides that Article 9(1)(b) shall not apply to the CTAs that already contain an equivalent provision.

Application of Article 9 of the MLI to the Relevant Provisions in the CTAs - the Australia perspective

Australia gave notification to the Depositary pursuant to paragraph 9(7) that paragraph 1 shall apply to all of its 42 CTAs including the covered tax agreements with China (provisional), Japan, Malta, New Zealand, Singapore and the United Kingdom, provided that these treaty jurisdictions do not reserve the right for Article 9(1) to apply to their CTAs with Australia. Israel and Isle of Man are excluded because Australia has not signed double tax treaties with them.

Exception to the Reciprocity Principle – Compatible Provision

As noted, out of a total of Australia's 42 CTAs, 19 of the CTAs already contain a provision that has expanded the scope of shares to cover comparable interest in a land-rich entity such as interest in a partnership or trust, which is provided under Article 9(1)(b) of the MLI. Pursuant to Article 9(6)(e) of the MLI, Australia reserves its right not to apply paragraph 1(b) of Article 9 to these 19 CTAs including the tax treaties with Japan, New Zealand, and the United Kingdom. These 19 CTAs, as an exception to the reciprocity principle, will not be subject to modification under Article 9(1)(b). It is also noted that the tax treaty with China does not contain the provision under paragraph 9(1)(b). Therefore, Article 9(1)(b) shall apply to the Australia-China CTA.

Application of the capital gain Article of the MLI to Australia-UK Tax Treaty

Australia and the United Kingdom have different positions on Article 9(1). Australia adopts Article 9(1) in full. The United Kingdom has opted out of Article 9(1), meaning that in the absence of adopting the alternative provision in paragraph 4, the entire Article 9 shall not apply to United Kingdom's CTAs.

The existing Article 13(4) [Alienation of Property] of the Australia-United Kingdom CTA contains a provision that provides that the gain from the alienation of share or comparable interests in partnership or trust shall be taxed in the other jurisdiction, but the Australia-UK CTA does not contain the 365-day holding period requirement as provided under Article 9(1)(a) of the MLI. Since the UK has reserved its right not to adopt the entire Capital Gain Article of the MLI in whole, the text of existing Article 13(4) shall not be subject to modification by the compatibility clause under Article 9(1).

Application of the capital gain Article of the MLI to Australia-Japan Tax Treaty

Both Australia and Japan adopt Article 9(1) in full. Since the existing CTA already covers the shares in a company or interests in a partnership, trust or other entity, only the inclusion of the holding period as provided under Article 9(1)(a) is required.

The synthesized text of the MLI provision and Article 13(2) of the Australia-Japan CTA shall read:

Article 13 – Alienation of Property

2. Income, profits or gains derived by a resident of a Contracting State from the alienation of shares in a company or of interests in a partnership, trust or other entity may be taxed in the other Contracting State where the shares or the interests derive at least 50 percent of their value directly or indirectly from real property referred to in Article 6 and situated in that other Contracting State.

  1. Paragraph 2 of Article 13 of the MLI shall apply if the relevant value threshold is met at any time during the 365 days preceding the alienation. [Article 13(2) of the MLI shall be added to the last sentence of paragraph 2.]

Application of the capital gain Article of the MLI to Australia-New Zealand Tax Treaty

Both Australia and New Zealand adopt Article 9(1) in full. Since the existing CTA already covers the shares in a company or interests in a partnership, trust or other entity, only the inclusion of the holding period as provided under Article 9(1)(a) is required.

The synthesized text of the MLI provision and Article 13(4) of the Australia-Japan CTA shall read:

4. Income, profits or gains derived by a resident of a Contracting State from the alienation of any shares or comparable interests deriving more than 50 per cent of their value directly or indirectly from real property situated in the other Contracting State may be taxed in that other State.

  1. Paragraph 2 of Article 13 of the MLI shall apply if the relevant value threshold is met at any time during the 365 days preceding the alienation. [Article 13(2) of the MLI shall be added to the last sentence of paragraph 4.]

Application of the capital gain Article of the MLI to Japan-New Zealand Tax Treaty

Both Japan and Zealand opts in for Article 9(4), and both of the two contracting states have made notification to the Depositary, pursuant to Article 9(8) of the MLI.

The synthesized text of Article 9 of the MLI and the tax treaty provision shall read (with strikethrough words):

Article 13 ALIENATION OF PROPERTY

2. Income, profits or gains derived by a resident of a Contracting State from the alienation of shares or interests in a company, partnership or trust deriving at least 50 per cent of the value of its property directly or indirectly from immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other Contracting State, unless the relevant class of the shares or the interests is traded on a recognised stock exchange specified in subparagraph (c) of paragraph 6 of Article 22 and the resident and persons related or connected to that resident own in the aggregate 5 per cent or less of that class of the shares or the interests.

4. For purposes of the Convention, gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting State if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property situated in that other Contracting State.

The texts of Article 9(4) of the MLI shall replace Article 13(2) of the CTA as the two contracting states have made a matched notification to the Depositary.

Application of the capital gain Article of the MLI to Australia-China Tax Treaty

China reserves its right for Article 9(1)(a) [the 365-day test period] not to apply to its CTAs. Therefore, only Article 9(1)(b) [gain from the alienation of shares or comparable interests] shall apply to the provision of the CTA.

The synthesized text of Article 9(1) of the MLI and Paragraph 4 of Article 13 of the Australia-China DTA will be read as follows:

Article 13 – Alienation of Property

4. Gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting State if these shares or comparable interests derived wholly or principally their value directly or indirectly from immovable property (real property) situated in that other Contracting State.

Alternative Provision under Article 9(4)

The above covers the application of Article 9(1) to the CTAs by those selected contracting. Part III of this paper will cover the Application of Article 9(4) to the CTAs.

[1] A Party is a signatory that has deposited to the OECD Depositary the Instrument of Ratification, Acceptance or Approval and has confirmed its MLI position definitively.

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.

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