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China And Singapore Sign New Tax Treaty

by Mary Swire,, Hong Kong

07 August 2007

The Chinese State Administration of Taxation (SAT) and the Inland Revenue Authority of Singapore (IRAS) concluded a new Double Tax Treaty at the recent 4th China-Singapore Joint Council for Bilateral Cooperation meeting, held in Singapore.

The new China-Singapore DTT replaces the existing treaty, which has been in force since 12 December 1986, and will enter into force after ratification by both countries.

The DTT will apply to income arising in the year after its entry into force. The Chinese tax authority is expected to issue a tax circular shortly to release this new DTT and clarify the date of enforcement.

Under the new treaty, withholding tax on dividends paid by a Chinese company to a Singapore resident are cut to 5% from 7%, provided that the recipient is a company that holds at least 25% of the capital of the Chinese company. In all other cases the withholding tax on dividends has been cut to 10% from 12%.

Dividends from a Chinese foreign investment enterprise (FIE) with at least 25% registered capital held by Singaporean investor(s) are generally exempt from WHT under the current Chinese domestic tax legislation. All other cases are taxed at 10%.

A 6% withholding tax on royalties will apply under the new treaty to lease payments relating to industrial, commercial or scientific equipment, when paid by a Chinese company to a Singapore resident. In all other cases, withholding tax will remain unchanged at 10%.

The scale of withholding taxes that apply to interest will remain unchanged under the new treaty: 0% applies to interest received by the specified governmental bodies of Singapore; 7% for interest paid by a Chinese company to a Singapore bank or financial institution; and 10% for all other cases.

The updated treaty provides a full tax exemption in China on a capital gains derived by a Singapore investor from the disposal of shares in a Chinese company, provided that: 1) the Singapore investor's shareholding in the Chinese company is less than 25% during the 12 month period before the alienation of the shares; and 2) No more than 50% of the value of shares disposed is derived, directly or indirectly, from immovable property situated in China.

There is also a change in the basis period for counting the number of days of presence in China for Singapore employees frequently visiting China, from a calendar year to any 12-month period.

Other changes include: amendments to the 'tie-breaker' rule to determine the residence status of an individual or a company which is a resident of both countries; the addition of anti-abuse provisions regarding passive income; and the inclusion of a tax sparing clause enabling, from a Singaporean perspective, credit on dividend, royalties and interest to be withdrawn.

Accounting firm PricewaterhouseCoopers notes that the Singapore government had been keen to to revise the tax treaty with China, after the Hong Kong/China DTA was revised earlier this year to include more attractive withholding tax rates on dividends and interest, making Hong Kong a more favourable location for moving investments into China. The revised China/Singapore treaty is expected to add choice for multinationals when selecting the location for an intermediate company to hold investments in China, PwC said.

A comprehensive report in our Intelligence Report series looking at offshore and onshore corporate structures and their tax implications is available in the Lowtax Library at and a description of the report can be seen at

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