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

Last Updated: 10 June 2019
Article by Alfred Chan

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

Paragraph 1 of Article 9 of the MLI - Capital Gains from Alienation of Shares or Interests of Entities Deriving their Value Principally from Immovable Property - addresses situations in which assets are contributed to an entity shortly before the sale of shares or comparable interests (such as interests in a partnership or trust) in that entity in order to dilute the proportion of the value of the entity that is derived from immovable property. [1]

Article 9(1) of the MLI 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.

Further, Article 9(4) provides an optional provision that offers an alternative way to address the particular BEPS issue that is dealt with in Article 9(1). Article 9(8) provides some rules for its application:

Each Party that chooses to apply paragraph 4 (of Article 9) shall notify the Depositary of its choice. Paragraph 4 shall apply to a CTA only where all contracting jurisdictions have made such a notification. In such case, paragraph 1 shall not apply with respect to that CTA.

As the following table shows, a Signatory or Party [2] to the Convention can choose to apply paragraph 4 either in addition to or to the exclusion of paragraph 1.

Table 1. The Article 9(4) option

Choose to apply paragraph 9(4), in addition to paragraph 1

Notification given under paragraph 7

Japan, New Zealand

not to apply (opt out of) paragraph 1 and chosen to apply (opt in for) paragraph 9(4)

Reservation made under paragraph 6(a) and notification given under paragraph 8

Israel, Italy (provisional) and Malta (provisional)

In respect of New Zealand's CTAs, some of them contain a specified value threshold in shares or comparable interest in the land-rich entity but do not contain the 365-day testing period as required under Article 9(1)(a). Out of a total of 37 CTAs, 23 of the New Zealand CTAs do not satisfy the requirement for Article 9(1)(a), including the tax treaties with Australia, Austria, Ireland, Japan and Sweden. These 23 CTAs, in respect of which no reservations are made under Article 9(6)(a), will be subject to modification by the compatibility clause under paragraph 9(2). That is, the provision of the 365-day testing period shall apply in the absence of such a testing period. That is, it will be added to those CTAs.

Alternative provisions are introduced to update the CTAs that, concluded decades ago, do not follow the newest version of the Model Tax Convention. For that reason, some of the New Zealand CTAs do not meet the 365-day testing period and a specified value threshold for the shares or comparable interest in the land-rich entity. Examples are the New Zealand-Belgium tax treaty and the New Zealand-Korea tax treaty, both of which are now under re-negotiation. New Zealand has covered this group of CTAs by opting in for paragraph 4, which provides for both the 365-day testing period and specified value threshold in shares or comparable interest. The notification under paragraph 8 is not given at the ratification day. But New Zealand can give notification later pursuant to Article 29(6) of the MLI.

A contracting jurisdiction can choose to apply paragraph 9(4) but reserve its right not to apply paragraph 9(1). Israel, Italy (provisional) and Malta (provisional) have adopted such positions.

Alternative Provision under Article 9(4)

A Party to the Convention can choose to apply Article 9(4) either in addition to, or to the exclusion of Article 9(1) to bring them in line with the 2017 update on the OECD Model Tax Convention.

Table 2 - Contracting jurisdictions exercising opt-in provision under Article 9(4)

Alternative provision under Article 9(4)

Israel and Malta opt out of Article 9(1) pursuant to Article 9(6)(a), but both opt-in for Article 9(4). Pursuant to Article 9(8), both contracting jurisdictions have notified the Depositary of the Article and paragraph number of each such provision. Since the notifications are matched, Article 9(4) shall replace the relevant provision of the Israel-Malta CTA, pursuant to Article 9(8).

Both Japan and New Zealand choose to apply Article 9(4) of the MLI to their CTAs, in addition to Article 9(1). Both have given notifications to the OECD Depositary pursuant to Article 9(7). Where any contracting jurisdiction opts in for an Article of, or a provision of the Article, of the MLI, it is required to notify the OECD Depositary in order to give the legal effect to the optional provision under the MLI.

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

Both Japan and Zealand opt 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 the strikethrough texts replaced):


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.

Pursuant to Article 9(7), the texts of Article 9(4) of the MLI shall replace Article 13(2) of the Japan-New Zealand CTA as the two contracting states have made a matched notification to the Depositary.

New China-New Zealand tax treaties

New Zealand did not include China in the list of CTAs that it confirmed at the time of deposit of its Instrument of Ratification on 18 June 2018. It is noted that New Zealand recently signed a revised tax treaty with China on 1st April 2019 that provides for both the 365-day holding period and specified value threshold in shares or comparable interest. It is anticipated that New Zealand will give notification to include China into the list of its CTA later pursuant to Article 29(5).

Article 13(4) of the China-New Zealand double tax treaty (signed but not yet effective) contains both the holding period and specified value threshold requirements with respect to the tax treatment of capital gains:

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, 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, as defined in Article 6, situated in that other State

Concluding comments

It appears that there is a clash between China's MLI position that provides that China has reserved its right not to apply the holding period to its CTAs, and Article 13(4) of the newly concluded tax treaty. However, by signing a new China-New Zealand tax treaty, the two Parties move a step closer to the object and purpose of the MLI, not away from it. This practice is endorsed by the monitoring system of the Inclusive Framework. In addition, one can refer to Article 30(3) of the Vienna Convention on the Law of Treaties for guidance which provides that the new tax treaty shall prevail over the earlier one. It reads:

"When all the parties to the earlier treaty are parties also to the later treaty but the earlier treaty is not terminated or suspended in operation under article 59 (the Vienna Convention), the earlier treaty applies only to the extent that its provisions are compatible with those of the later treaty."

The earlier-concluded treaty is the MLI signed on 7 June 2017, which applies to the extent that the provisions of the MLI are compatible with the later treaty signed on 1 April 2019. In this regard, that is the newly concluded treaty between China and New Zealand.

[1] See paragraph 128 of the Explanatory Statement to the MLI.

[2] A Party is a signatory that has deposited to the OECD Depositary the Instrument of Ratification, Acceptance, or Approval.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions