The People's Republic of China and the Government of the Kingdom of the Netherlands signed a new double taxation treaty ("DTA") on 31 May 2013. The new treaty - which still has to be ratified by both countries - replaces the current treaty that entered into force in 1987 and is to a large extent modeled on the 2010 OECD Model Convention. The new treatywill further improve the economic ties between the Netherlands and Mainland China.

The DTA, together with the Netherlands participation exemption regime and extensive tax treaty network, makes the Netherlands a tax-efficient gateway into Europe and the rest of the world for companies and individuals from China. Likewise, the DTA provides a favorable basis for Dutch companies to enter or further expand their activities in China. Distinctive features of the new DTA are:

  • In accordance with the 2010 OECD model convention, the DTA provides that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months. Under the current double taxation agreement such site or project already constitutes a permanent establishment if it lasts more than 6 months.
  • The DTA provides for a reduction of withholding tax to 5% on dividend payments arising in one state and paid to a beneficial owner of the income concerned resident in the other state, if the receiving entity holds directly an equity interest of at least 25% in the in the paying entity. In all other cases each country may only levy 10% withholding tax. The People's Republic of China's domestic rate is 10% and the Netherlands domestic rate is 15%.
  • The DTA includes a specific anti-abuse provision disallowing a reduction of withholding taxes on dividends if the main motive, or one of the main motives, is to set up a specific structure to benefit from the DTA.
  • The right to tax capital gains is generally allocated to the jurisdiction of the company realizing the gain, but the other jurisdiction may - subject to certain limited exceptions - tax capital gains on:

    • the shares in a company deriving more than 50% of its asset value directly or indirectly from real estate situated in that other jurisdiction; and
    • the shares in a company if the company realizing the gain directly or indirectly held at any time in the period of 12 months prior to the sale an equity interest of at least 25% in the company of which the shares are sold.

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