CHINA Law and Practice Contributed by: Mei Zhang, DaHui Lawyers
aforesaid laws, the provisions of the treaty or agree - ment will prevail. This establishes a binding principle of treaty precedence within the Chinese legal system. In practice, however, international tax law relies on domestic law for its enforcement and operational effect. Domestic legislation provides the essential pro - cedural and administrative framework. For instance, the application of preferential withholding rates under DTAs or the implementation of the Automatic Exchange of Information (“AEOI”) under multilateral conventions must be enforced through specific domestic rules and procedures. The PRC Tax Collection and Administra - tion Law, along with a series of provisions on the with - holding of tax on China-sourced income, exemplifies how domestic law operationalises and facilitates the smooth functioning of international obligations. Thus, the relationship is one of normative supremacy of international law, coupled with practical depend - ence on domestic legal machinery for implementation. 1.3 OECD Model/United Nations Influence on Treaty Practice The terms and core principles of China’s DTAs are consistent with the OECD Model Tax Convention and the UN Model Double Taxation Convention. However, in their practical implementation, Chinese tax authori - ties have adopted more stringent interpretations and requirements in specific areas, as detailed below. • Stricter “beneficial owner” (“BO”) criteria: China’s domestic tax circulars impose more rigorous conditions for claiming treaty benefits than those suggested in the OECD Commentary. For instance, according to the Circular on Issuing the Agreement between the Government of the People’s Republic of China and the Government of the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income and Interpretations on the Clauses of the Protocols thereof, a non-resident enterprise must qualify as the BO of income, such as dividends, interest, or royalties, to be eligible for preferential withholding tax rates. This requirement has been further tightened by the Announcement of the State Administration of Taxation on Issues concerning the Beneficial Owner in Tax Treaties
(Announcement of the State Administration of Taxation [2018] No 9, or “Circular 9”). Circular 9 stipulates that to be recognised as a BO, an entity must not only have control over the income and related assets but must also conduct substantive business operations. It also provides a list of nega - tive indicators that are used to assess whether an entity lacks the substance to be a BO. • Additional holding period requirement for divi - dend benefits: While the OECD Model Convention states that it is at the discretion of the contracting states to include or exclude a condition requiring a company receiving dividends to own at least 25% of capital for a designated period before distribu - tion, China’s interpretation is explicitly stricter. According to the Circular of the State Administra - tion of Taxation on Relevant Issues Concerning the Implementation of Dividend Clauses in Tax Treaties, to avail itself of the preferential DTA rate on dividends (eg, the 5% rate for a 25% or greater shareholding), the foreign recipient company must have held the equity interest in the Chinese com - pany continuously for at least 12 months prior to the dividend declaration. This imposes a concrete holding period prerequisite not universally required by the model convention. 1.4 Multilateral Instrument The PRC was an early participant in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”), having signed it during the first signing ceremony in 2017. China deposited its instrument of ratification for the MLI with the OECD on 25 May 2022. Following the standard procedural interval, the MLI entered into force in China on 1 September 2022.
2. Territoriality, Residence and Permanent Establishment
2.1 General Principle of Territorial Taxation China’s tax jurisdiction is founded on a dual principle: residence-based jurisdiction and source-based juris - diction. This means the tax obligations of a taxpayer are determined by either their resident status in China or the source location of their income, with special rules applying to the Hong Kong and Macao SARs.
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