New Sino-German Double Taxation Agreement Enters Into Force

On 28 March 2014, a new Double Taxation Agreement (“New DTA”) was signed between the governments of the PRC and Germany to replace the current DTA signed on 1985. Both the Chinese and German sides have completed the legal procedures in their countries necessary for the effectiveness of the New DTA. The New DTA entered into force on April 6, 2016, and will apply to the income obtained on 1 January 2017 and thereafter.

As one of the major changes of the New DTA, reduced rate of 5% and 15% will apply to withholding income tax (WIT) on dividends additional to 10% in current DTA. The following chart shows the changes and criteria concerning the WIT rate on dividends.

WIT Rate Current DTA New DTA
5% Nil The beneficial owner is a company (other than a partnership) which holds directly at least 25% shareholding of the company paying the dividends.
10% The recipient of the dividends is the beneficial owner. In all other cases rather than adopting 5% or 15%.
15% Nil The dividends are paid out of income/gains derived directly or indirectly from immovable property (defined in Article 6 of New DTA) by an investment vehicle which distributes most of this income/gains annually and whose income/gains from such immovable property is exempted from tax.

We especially emphasize that a partnership company cannot enjoy the reduced 5% WIT according the New DTA. For a German investor who is partnership company, a special investment vehicle registered in Hong Kong may continue to minimize the overall WIT to 5%.

Further to the changes on dividends WIT, the clauses regarding Permanent Establishment, interest, loyal fee, capital gains and etc. have been revised as well. We recommend considers the changes when business plan for future to seek better economic benefit.