By Heather Corben and Tony Dong     King & Wood Mallesons’ Taxation Group

The UK government has made clear its ambition to improve economic links with China and to make it easier for business to be done between the two countries. Recent initiatives have included the relaxation of visa requirements for Chinese visitors to the UK, George Osborne’s trade trip to China in October 2013, and David Cameron’s visit in December with a 100-strong trade delegation. According to China’s ambassador to Britain, trade between the two countries surpassed £42.5 billion in 2013. A further sign of the UK government’s enthusiasm is the new comprehensive double taxation agreement (DTA) between the UK and China.

The DTA takes effect in China in relation to income and gains arising in tax years beginning on or after 1 January 2014. In the UK, it takes effect from 6 April 2014 in relation to income and capital gains tax and from 1 April 2014 for corporation tax. The new DTA is largely consistent with the OECD Model Double Tax Convention. The previous treaty, which dated from 1984, did not include provisions found in more modern agreements, such as a detailed exchange of information provision.

Although the new treaty was signed in June 2011, implementation was delayed because of a particular concern of the Chinese government in relation to withholding tax on dividends, as explained below. China approached the UK to request a change to these provisions, and the protocol amending the 2011 treaty was signed in Beijing on 27 February 2013.

Dividend withholding tax

The dividend withholding tax rate under the previous treaty was 10%. Importantly for UK residents investing in China, the new DTA imposes a maximum dividend withholding tax of 5% for corporate investors beneficially owning at least 25% of the capital of the dividend-paying company, and a 10% withholding tax rate in other cases.

The treaty signed in June 2011 permitted indirect holdings, as well as direct holdings, to be taken into account in reaching the 25% beneficial ownership threshold required to benefit from the reduced 5% withholding tax rate.

However, China had concerns about the inclusion of indirect holdings for these purposes, and, after the requested Chinese revisions, the 5% withholding tax rate now applies only where the 25% is held directly.

The reduction in withholding tax rates to 5% and 10% are important for UK residents investing in China, but is perhaps not so significant for investment flowing in the opposite direction. Under current UK law, there is generally no withholding tax on dividends, so Chinese residents investing in the UK would not suffer withholding tax on dividends in any event.

The UK does impose a 20% withholding tax on property income distributions paid by real estate investment trusts and property authorised investment funds. The reduced 5% and the 10% withholding tax rates set out above would not apply to such distributions. The DTA contains a specific provision imposing a maximum withholding tax of 15% where:

  • the dividends are paid out of income or gains derived directly or indirectly from immovable property;
  • the investment vehicle distributes most of this income or gains annually; and
  • the investment vehicle’s income or gains from such immovable property is exempted from tax.

Chinese residents receiving property income distributions from a UK real estate investment trust (REIT) or property authorised investment fund (PAIF) will therefore suffer withholding tax at a rate of 15% rather than 20%.

Withholding tax on interest and royalties

No change has been made in the DTA to the maximum withholding tax on payments of interest, which remains at 10%.

There has been a minor reduction, from 7% to 6%, in the amount of withholding tax on royalties from the use of, or right to use, industrial, commercial or scientific


Table 1 sets out the key changes to withholding tax on various types of income.

Capital gains

For UK residents seeking to invest in China, another key benefit of the new DTA is the complete relief from tax on capital gains when disposing of holdings of less than

25% in Chinese companies, although this does not apply to shares in property-rich companies. Previously, capital gains on the disposal of shares in China were subject

to withholding tax at 10% because the 1984 treaty did not exclude any gains on the disposal of Chinese shares from the imposition of tax in China.

Technical fees

The 1984 treaty permitted the charging of a 7% withholding tax on technical fees, regardless of whether the technical, supervisory or consultancy services provided had created a permanent establishment. The new DTA no longer includes an Article on technical fees but instead includes within the definition of a permanent establishment the furnishing of services by an enterprise through employees or other personnel. This applies where the provision of services is for more than 183 days in a 12-month period.

While at first glance this does not seem more generous than the permanent establishment test of ‘six months in a 12-month period’ that appears in many of China’s treaties with other countries, the test in the UK–China DTA is more helpful. Local tax authorities in China have, in practice, applied the ‘six months’ test by counting one day’s presence in a month as a whole month; this can significantly increase the permanent establishment risk even if the actual length of stay in China is limited. The precision in the drafting of the ‘183 days’ test is therefore welcome. The abolition of the technical fees article and the introduction of the service’s permanent establishment provision provide more certainty for UK enterprises providing services in China by reducing the risk of creating a permanent establishment.


Compared with the rest of China’s current treaty network, the UK–China DTA provides the most favourable treaty benefits that apply only to a small group of countries and territories, including Hong Kong, Singapore, Ireland, Luxembourg, Sweden, Barbados and Mauritius. Taking this together with the generous UK regime involving no withholding tax on dividends, (normally) no tax on capital gains for non-residents, and interest deductions on loans financing foreign equity investments (subject to certain limits), the UK may now be regarded as a very competitive jurisdiction for both Chinese investment into the EU and investment from EU countries into China. A Chinese investor can, by establishing a UK resident holding company, benefit from EU nondiscrimination principles, the Parent-Subsidiary Directive, the Merger Directive and the Interest and Royalty Directive within the EU. In addition, a UK holding company would not be caught by China’s controlled foreign company (CFC) rules because the UK is a white list territory, although the UK’s own CFC rules would need to be considered if it is used as a holding company jurisdiction. Further advantages of establishing a UK holding company in these circumstances include the exemption from UK corporation tax for a UK holding company on profits from the disposal of shares in its subsidiaries. This is provided that the conditions for the substantial shareholding exemption to be satisfied are fulfilled and a broad exemption from corporation tax for distributions received (again subject to certain conditions) from both UK and non-UK companies, whether inside or outside the EU. The UK tax resident company can also benefit from an exemption from UK tax on profits attributable to a non-UK permanent establishment.


The long-awaited entry into force of the UK–China DTA is welcome not only for UK companies looking to invest in China, but also in making UK holding companies attractive for both inbound and outbound investment flows between China and the EU. The increased tax efficiency represents an important step in the UK government’s drive to encourage cross-border trade and investment with China.