New DTA between New Zealand and China signed
Tax Alert - April 2019
By Jenny Liu and Michelle Shi
On 1 April 2019, a new double tax agreement (DTA) between the People’s Republic of China and New Zealand was signed. This agreement, when in force, will replace a 1986 agreement and therefore introduces a modern set of tax rules in relation to cross border economic activity.
With regard to withholding taxes, a key change is to introduce a new lower 5% withholding tax rate for dividends where the beneficial owner is a company that has held a direct interest of at least 25% of the capital of the company throughout a 365-day period that includes the payment date.
Dividends paid to a beneficial owner who is the government of the state would not be taxed, provided that the government and its associated enterprises hold directly or indirectly no more that 25% of the voting power in the company paying the dividend.
With regard to the royalty article and specifically the definition, the trend when updating tax treaties has been to remove “the use of , or the right to use, any industrial, scientific or commercial equipment” from the royalty definition so these payments are taxed as business profits under article 7 (i.e. where there is a permanent establishment). However, there has been no change in this regard in the new agreement such that these payments will still be treated as a royalty for DTA purposes. Under New Zealand tax rules, these payments are taxed as schedular payments and so the effect of the treaty in this case is (still) to limit the non-resident contractor’s withholding tax to 10%. A special rate certificate should be obtained in order to apply this reduced rate.
For a person other than an individual, under the 1986 agreement, the person is treated as a resident of the Contracting State in which its head office is situated. In the new DTA, this tie breaker test has been removed meaning that in dual residence situations, the residence of the person can only be determined by mutual agreement between the competent authorities. In the absence of such agreement, the person shall not be entitled to any relief or exemption provided by the DTA. This may prove to be difficult and therefore companies should do their best not to be in a dual residency position.
A key change to the permanent establishment article is in relation to a building site, or construction, assembly or installation project. Positively, the time frame before a permanent establishment will arise has been extended from 6 to 12 months.
Multilateral convention measures
What is perhaps interesting is that while the existing 1986 DTA is a “covered agreement” for the purposes of the multilateral convention to implement related measures to prevent base erosion and profit shifting (MLI), China’s position on this when compared to New Zealand’s meant that many of the new MLI articles would not actually apply to the 1986 DTA. For example, all of the changes to the permanent establishment articles (artificial avoidance through the use of commissionaire arrangements, specific activity exemption and splitting up of contracts) do not apply. Although China has not yet ratified the MLI and therefore it has not come into force for the 1986 DTA. However, the new DTA not only incorporates the new MLI articles where there was agreement, but does now incorporate some of these other articles. For example, article 12 of the MLI which concerns artificial avoidance of the permanent establishment status through Commissionaire Arrangements has actually been included in the permanent establishment article of the new agreement despite China initially reserving its right to adopt this MLI article. Broadly, this article means that if a person acts on behalf of an enterprise and in doing so habitually concludes certain types of contracts, or habitually plays the principal role leading to the conclusion of certain types of contracts that are routinely concluded without material modification by the enterprise, a permanent establishment will arise. The fiscally transparent wording (Article 3 of MLI) and definition of person closely related to an enterprise (Article 15 of MLI) have also been included in the DTA.
The other point to note is that this signed agreement will not come into force until domestic procedures in both countries have been completed and there is an exchange of diplomatic notes. This could take some months yet. If this process occurs during the 2019 calendar year, the earliest date that this agreement could apply would be from 1 January 2020 in respect of withholding taxes; or for any taxable year beginning on or after 1 January 2020 for other taxes.
From a practitioner’s perspective, a new modern DTA which incorporates the MLI articles certainly makes working with DTAs easier, therefore this is a welcome development.
For more information on how the new DTA will apply to cross border transactions, please contact your usual Deloitte advisor.