- The 30 March BOE published the treaty with China, signed in Madrid on 28 November 2018.
- It enters into force on 2 May 2021 and replaces the 1990 treaty.
- It caps source withholding at 5% or 10% on dividends and at 10% on interest and royalties.
On 30 March 2021 the BOE published the Convention between the Kingdom of Spain and the People’s Republic of China for the elimination of double taxation with respect to taxes on income and the prevention of tax evasion and avoidance, and its Protocol. It was signed in Madrid on 28 November 2018 and enters into force on 2 May 2021, three months after the last notification of completion of both countries’ internal procedures. It replaces the convention signed in Beijing in 1990.
Double taxation treaties share out between two countries the right to tax each type of income and set limits on withholding, so that the same income is not taxed twice. For companies and families with Chinese investments, subsidiaries, suppliers or customers, the change is relevant because it alters the maximum source rates and the rules on when an activity creates a permanent establishment in the other country.
Source withholding
On dividends, the treaty caps withholding at 5% of the gross amount when the beneficial owner is a company that directly holds at least 25% of the capital of the paying company, and at 10% in other cases. On interest and royalties the maximum rate is 10%. There are exemptions for certain public entities. The Protocol clarifies that these limits apply directly, and not through a later refund procedure, when they are lower than those of domestic law.
That is a relief compared with the general Spanish rule: for residents outside the European Union without a permanent establishment, withholding on dividends and interest is 19% and on royalties 24%. In practice, the treaty reduces the burden of withholding on payments between the two countries, although it requires proof of tax residence and that the recipient is the beneficial owner of the income.
Permanent establishment and services
The treaty treats a construction, installation or assembly site as a permanent establishment when it lasts more than twelve months. A permanent establishment also arises from providing services, including consultancy, through employees or other personnel, when the activities continue in the other country for more than 183 days in any twelve-month period. These rules decide when a foreign company must pay tax in the other State on the profits of its activity there.
Gains from the sale of real estate located in the other country, or of assets forming part of a permanent establishment, may be taxed in that country. And the text includes procedures for exchange of information and for amicable resolution of disputes between the two administrations, which give companies a route when they believe they are being taxed contrary to the treaty.
Anti-abuse clause and review
Like the most recent treaties, the text includes an anti-abuse clause: benefits are not granted if, taking all the facts into account, one of the principal purposes of the transaction was to obtain them, unless granting them is in line with the object and purpose of the treaty. It also contains rules for wholly or partly transparent entities. All this requires a real economic justification behind structures.
Companies with commercial or financial relations with China should review with their adviser the dividend, loan and licence contracts between group companies, the tax residence documentation and any construction or service projects that extend over time. This information is general; the treaty applies only from its entry into force and with the effects set by its article 30.
A new treaty does not change business, but it does change its tax cost: it is worth checking which withholding rates apply from May.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
