Mainland China and Macau Arrangements on Avoiding Double Taxation and Preventing Tax Evasion Protocol with Respect to Taxes on Income The Fourth Protocol

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Mainland China and Macau Arrangements on Avoiding Double Taxation and Preventing Tax Evasion Protocol with Respect to Taxes on Income

The Fourth Protocol

The fourth protocol to the “Arrangement between the Mainland of China and the Macau Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income” (hereinafter referred to as “The Fourth Protocol”) was signed in Macao on November 28, 2019 and effective from May 14, 2020.

 

The Mainland China and Macao have completed the required domestic legal procedures for the entry into force of The Fourth Protocol. The Fourth Protocol has entered into force on May 14, 2020, but the provisions of Article 6 shall apply to income obtained on or after May 14, 2020, and the provisions of other articles shall apply to the income obtained on or after January 1, 2021.

 

For the revised “Arrangement”, please refer to the ” Arrangement between the Mainland of China and the Macau Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ” compiled by Kaizen. Kaizen hereby compares the terms and briefly interprets the revised terms for Kaizen’s existing customers and potential customers reference.

 

Article 1   Personal Scope

 

Before Revised
This arrangement shall apply to a person who is a resident of One Side or a resident of both Sides. This arrangement shall apply to a person who is a resident of One Side or a resident of both Sides.
An entity or arrangement deemed to be completely transparent or partially transparent in accordance with tax law of any Side, the income obtained or obtained through it shall be regarded as the income obtained by a resident of One Side, but only to the extent that the income is regarded as the income obtained by a resident of One Side.
“Arrangement” shall not affect the tax imposed to its residents (except for the specific provisions listed in the Fourth Protocol).

 

The Fourth Protocol still stipulates that the “Arrangement” applies to a person who is a resident of One Side or a resident of both Sides. The change in this article is that it incorporates provisions on “Tax Transparent Bodies”. The term “person” includes natural persons, companies and other organizations, partnership is a special organization which is between natural persons and companies. Organizations that are treated as tax transparent bodies are not limited to partnerships, but also include organizations such as trusts.

 

Kaizen takes the partnership as an example for further explanation in this article. At the level of domestic law in Mainland China, the transparent nature of partnerships in Mainland China is reflected in the principle of “distribute the taxable income first and then calculate the tax amount”, that is, while the partner is the taxpayer which is a natural person, individual income tax is imposed; while the partner is a legal entity or other organization, enterprise income tax is imposed. Therefore, the partnership itself becomes a tax transparent body, and income tax directly penetrates the partners.

 

At the agreement level, if a partnership is regarded as a company or taxed in a company manner which is regarded as a taxable entity, then the partnership is a resident of One Side and should enjoy the tax treaties; otherwise, if the partnership is regarded as a tax transparent body, then the partnership is not a resident of One Side and cannot enjoy the tax treaties. If the partnership is regarded as a resident of One Side and enjoys tax treaties, the Other Side is not restricted from taxing the income of the partners which are considered as resident of the Other Side.

 

Article 4   Residents

 

Before Revised
A person other than an individual is a resident of both Sides should be considered as resident of One Side where its head office or effective management establishment is located; if the “ person” has an effective management establishment on One Side and a head office on the Other Side, the competent authorities of both Sides shall negotiate with each other to determine its resident status. A person other than an individual is a resident of both Sides, the competent authorities of Both Sides shall endeavor to determine by mutual agreement the Side of which such person shall be deemed to be a resident for the purposes of this Arrangement, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by this Arrangement, except to the extent and in such manner as may be agreed upon by the competent authorities of both Sides.”

 

The Fourth Protocol amends the “Gabi Rule” for dual-resident entities, that is, when entities other than individuals constitute residents of both parties simultaneously, the rules of the “Arrangement” shall be applied only as the resident of One Side.

 

Previously, in the terms of the “Double Resident Entities Other Than Individuals” in China’s bilateral tax treaties, when an entity other than individuals had resident status of both Contracting States in accordance with the domestic laws of the Contracting States, the “Gabi Rule” was generally applied. That is, determine its country of residence according to its “Head office or the main office” “the place of registration or establishment” or “the location of the effective management establishment” determines.

 

After the amendment, the competent authorities of the Both Sides shall endeavour to determine by mutual agreement the Side of which such person shall be deemed to be a resident, and the objective criteria adopted in the Gabi rules (such as the location of the effective management establishment, the place of registration or the place of establishment and any other relevant factors) will only become the factors that the tax authorities “should consider”. This means that when determining the country of residence of a dual-resident entity, the importance of the criteria will be weakened, and taxpayers can only enjoy tax treaties when the tax authorities of both Sides agree on the resident status of the taxpayer.

 

Article 5   Permanent Establishment

 

  Before Revised
Permanent Establishment Where a person is acting in One Side on behalf of an enterprise and, concludes contracts in the name of the enterprise,, and these contracts are:

(1)  in the name of the enterprise; or

(2) for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use; or

(3)   for the provision of services by that enterprise,

The enterprise shall be deemed to have a permanent establishment in that One Side in respect of any activities which that person undertakes for the enterprise.

 Where a person is acting in One Side on behalf of an enterprise and, in doing so, habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are in the name of the enterprise, or for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or for the provision of services by that enterprise. That enterprise shall be deemed to have a permanent establishment in that One Side in respect of any activities which that person undertakes for the enterprise.

 
Independent Agent   An enterprise of One Side shall not be deemed to have a permanent establishment in the Other Side only because it carries on business in that Other Side through a broker, general commission agent or any other agent of an independent status who are acting in the ordinary course of their business. However, when the activities of such an agent are wholly or almost wholly performed on behalf of that enterprise, he shall not be deemed to be an agent of an independent status within the meaning of this paragraph. A person acts exclusively or almost exclusively on behalf of one or more enterprises to which that person is closely related, that person shall not be considered to be an independent agent within the meaning of this paragraph with respect to any such enterprise.

 

 

To add paragraph 8 to Article 5 of the Arrangement for a person shall be considered to be closely related to an enterprise as follows:

 

For the purposes of this Article, a person is closely related to an enterprise if, based on all the relevant facts and circumstances, one has control of the other or both are under the control of the same persons or enterprises. In any case, a person shall be considered to be closely related to an enterprise if one possesses directly or indirectly more than 50% of the beneficial interest in the other (or, in the case of a company, more than 50% of the voting rights and value of the company’s shares or of the beneficial equity interest in the company) or if another person possesses directly or indirectly more than 50% of the beneficial interest (or, in the case of a company, more than 50% of the voting rights and value of the company’s shares or of the beneficial equity interest in the company) in the person and the enterprise.”

 

Article 13   Capital Gains

 

Before Revised
Gains derived by a resident of One Side from the alienation of shares may be taxed in that Other side if, at any time within 4 years before the alienation, the recipient of the gains had a participation, directly or indirectly, of not less than 50% of the capital of the company. Gains derived by a resident of One Side from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the Other Side if, at any time during the three years preceding the alienation, these shares or comparable interests derived more than 50% of their value directly or indirectly from immovable property, as defined in Article 6, situated in that Other Side.

 

Article 21   Government Investment

 

In order to further promote capital flows between the Mainland China and Macao, and reduce the tax burden on cooperation projects that benefit the people, The Fourth Protocol adds a “Government Investment” clause, which stipulates that a government or local authority of One Side shall directly or indirectly contribute to the participation of the governments and local authorities of Both Sides in cooperation. The fund established by the Other Side mainly for the purpose of people’s livelihood, the income obtained directly or indirectly from the fund by the government or local authority of One Side shall be exempt from tax in the Other Side.

 

The funds jointly established by the governments and local authorities of the Both Sides. In Mainland China, include the Guangdong Province and Macao Cooperative Development Fund and other funds jointly recognized by the competent authorities of the Both Sides. In Macao, include funds jointly recognized by the competent authorities of Both Sides.

 

Article 26   Judgment of Eligibility for Enjoying Tax Treats Arrangements

 

“The Fourth Protocol” adds a ” Judgment of eligibility for enjoying preferential arrangements ” clause, that is, “Primary Purpose Test”. If one of the main purposes of taxpayer-related arrangements or transactions is to obtain preferential treatment for arrangements, it shall not enjoy preferential treatment for arrangements, which applied scope is extended from the provisions of “The Third Protocol” of dividends, interest, royalties and property income to all provisions.

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