On 9 February 2018, the State Administration of Taxation (SAT) issued Announcement 11 to supplement the earlier double tax agreement (DTA) guidance provided in Circular 75. This provides notable clarifications concerning the DTA treatment of foreign partnerships and the service permanent establishment (PE) timeframe calculations. There is also supplementary guidance on DTA transport and entertainer articles. The guidance applies from 1 April 2018.
Circular 75 is the most substantive piece of China DTA guidance and draws heavily on the commentary on the OECD Model Tax Convention (MTC). While it formally applies to the interpretation of the China-Singapore DTA, it is stated to be relevant to interpretation of treaties with provisions matching those in the China-Singapore DTA.
The Announcement 11 foreign partnership clarifications, however, diverge from the OECD approach. It is provided that, unless there are specific provisions in a given DTA dealing with partnership ‘transparency’ (e.g. under the China-France DTA), then foreign partnerships themselves must qualify for DTA benefits, for any relief to be available. This means that the foreign partnerships need to show that they possess tax residency certificates issued by foreign tax authorities, and have tax payment obligations as residents therein. It appears that one cannot just look through to the underlying partners and show that the partners paid tax, and then be able to claim DTA benefits on this basis. This differs from the approach, in the OECD MTC Commentary, that the source country should look at how the residence country taxes the partnership/partners, and follow this to determine the appropriate DTA relief claimant. By contrast, foreign partners in Chinese partnerships may claim DTA benefits, under the DTA between their country and China, as long as that country taxes them as residents.
The other significant clarification is that older China DTAs, whose service PE articles set a six month (rather than 183 day) threshold, should be interpreted as setting a 183 day test.
Apart from this, other clarifications include:
The partnership clarifications are potentially challenging for foreign businesses. At present, solely the China-France DTA has special provisions allowing for foreign partnership look-through. In practice, for other DTAs, taxpayers have, in the past, had case-by-case discussions with local tax authorities to agree foreign partnership look-through to access DTA relief. The new guidance would seem to close the door on this approach.
Given that, in commercial practice (and particularly for investment funds), many partnerships are set up as flow-through entities, and the partnerships themselves are not registered as tax residents, this could create extensive China DTA relief complications. While China could, potentially, look to add new protocols to its DTAs to provide for look-through, this would not assist with the many Cayman and BVI partnerships, used for China investment, given the lack of relevant China DTAs.
By contrast, the Service PE clarifications are helpful. This addresses the problem of aggressive local tax authorities asserting, for older DTAs with a six month threshold, that foreign company staff presence in China for one day in a month constitutes presence for a full month. This is of assistance in relation to the US, Canada, Australia, Spain, Norway, Malaysia, and South Korea DTAs, among others.