Introduction
On December 31, 2019, China’s State Administration of Taxation made a public announcement regarding the implementation of a new income tax treaty between China and New Zealand. This treaty, signed on April 1, 2019, successfully passed through both countries’ domestic legal and procedural channels, officially becoming effective on January 1, 2020. This marks another important step in China’s efforts to mitigate double taxation for international businesses and individuals.
China's Global Network of Double Taxation Treaties
As of the end of 2019, China had entered into 107 tax treaties with various countries, aimed at avoiding double taxation on corporate income, individual income, and other forms of taxable earnings. Out of these, approximately 100 treaties were already in force. In addition to bilateral agreements with sovereign states, China has also signed double taxation avoidance (DTA) arrangements with the Hong Kong and Macau Special Administrative Regions and a separate DTA agreement with Taiwan. To further support and coordinate its tax treaty framework, China has signed around ten tax information exchange agreements and participates in several multilateral conventions. These international frameworks work together to manage China’s tax obligations on a global scale and facilitate the implementation of treaty-related tax measures. China’s tax treaties and related regulations largely follow the guidelines of the Model Treaty Convention of the Organization for Economic Cooperation and Development (OECD), which helps to standardize and clarify international tax practices.
The Role of the OECD Model in China’s Tax Treaties
A significant aspect of these DTAs is the concept of a “permanent establishment” (PE) for foreign enterprises operating in China. Under most DTAs, if a foreign enterprise carries out business activities through a fixed, consistent place in China, it may be considered to have established a PE in the country. Once the Chinese tax authority confirms that a permanent establishment exists, the business profits earned through that establishment will be subject to China’s enterprise income tax. However, these taxes may be eligible for credit against taxes owed in the enterprise’s home country, provided certain requirements are met. This helps alleviate the burden of double taxation, allowing businesses to operate more efficiently across borders.
Permanent Establishment and Its Tax Implications
In addition to business profits, other forms of income earned by foreign enterprises or individuals, such as dividends, royalties, and capital gains, are also subject to specific withholding tax rates under the applicable DTA. The determination of these rates depends on the type of income and the specific treaty provisions in place. It is essential for foreign entities and individuals conducting business in China to carefully examine the relevant DTA provisions or consult with experienced Chinese tax lawyers before making any business decisions, as these rates and regulations can vary depending on the situation.
Tax Withholding and the Importance of Consulting Experts
In summary, the introduction of the China-New Zealand DTA is part of China’s broader efforts to foster international trade and investment while ensuring that tax obligations are fair and transparent. These agreements provide important mechanisms for avoiding double taxation, enhancing tax cooperation, and streamlining tax processes for international enterprises. However, given the complexity of tax regulations, it is crucial for businesses and individuals to consult professional tax advisors to fully understand their obligations and rights under the relevant DTA agreements before engaging in cross-border activities.