China has double-tax treaty agreements (DTA) with more than 80 countries, and the list continues to grow. Specifics of each DTA varies depending on individual arrangements, but the essence of all DTAs is that countries won’t tax businesses or individuals making taxable gains in both countries.
Treaty areas such as Hong Kong, Singapore, Barbados, Mauritius and Seychelles are not usually effective incorporation locations for taking a Chinese company to an overseas listing, but they offer favorable tax rates for setting up holding companies – companies that hold stakes in listed companies. The treaty countries listed above all advertise little or no tax on capital gains – taxes paid when shares of China-based companies are sold at a profit – and minimal tax on dividends from the China company.
Still, not all China trade treaties are the same.
“For investment into China, the China-Singapore treaty is still not as useful as other countries’ treaties,” said Bee Tin Poh, tax partner with Ernst & Young in Singapore. “A lot of investors are going via other locations, like Barbados, because [those locations] protect capital gains regardless of participation threshold.”
Lower income tax rates are another difference among treaty countries. Barbados, Mauritius and Seychelles provide income tax rates of 3%, 2% and 1.5%, respectively. This compares with statutory rates of 16.5% in Hong Kong and 18% for Singapore, although incentives can bring these down to single-digit rates.
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Yet each treaty country’s tax regime is only attractive so long as offshore companies are not classified as a China tax resident in the first place. This year, the Enterprise Income Tax (EIT) Law went into effect, making it more difficult for some offshore companies to remain tax non-residents.
Along with the EIT Law, new protocols in many of China’s DTAs more stringently define which foreign entities have a permanent establishment (PE) in China, thus qualifying as domestic tax residents.
“In order to mitigate any potential PE risk, many foreign enterprises are re-evaluating and restructuring their business models in China,” wrote Petrina Tam and Cathy Jiang, tax partners at PricewaterhouseCoopers (PwC) in Hong Kong, in a PwC tax column earlier this year.