• Professional News
  • 28 June 2012

New Tax Treaty between Denmark and China

During Chinese President Hu Jintao's recent visit to Denmark, a number of agreements were concluded between Danish and Chinese parties, including a new tax treaty replacing the treaty concluded in 1986. If the Danish as well as Chinese implementation is completed by the end of 2012, the new treaty may come into force on 1 January 2013.

The new treaty is intended to facilitate investments to and from China while making Denmark a hub for Euro-Chinese trading relations. Particularly interesting is the amendments made by the new treaty to the definition of permanent establishment and the taxation of dividends.

Dividend distributions
According to the 1986 tax treaty, dividends may be taxed at a rate of up to 10 percent in the source country. The new tax treaty reduces the applicable tax rate to 5 percent provided that the recipient is a corporate shareholder holding at least 25 percent of the shares in the distributing company. For all other shareholders, the applicable tax rate continues to be 10 percent.

No Danish withholding tax will be levied on qualifying distributions to China. To our knowledge, the 5 percent tax rate is among the lowest withholding tax rates available in any tax treaty yet concluded by China.

Permanent establishments
Under the 1986 treaty, a building site only constitutes a permanent establishment if activities continue for more than six months, while installations (including ships and drilling rigs) may constitute a permanent establishment if used for exploration or recovery of hydrocarbons for a period of more than three months.

The new tax treaty entails that, unless either activity extends beyond a twelve month period, no permanent establishment is created.

Benefitting from the new tax treaty
The new tax treaty between Denmark and China grants favourable possibilities for Chinese investors in Europe as well as for European investors in China. Investors may benefit from the extensive Danish tax treaty network, often allowing for dividends to be streamed through Danish entities with no Danish withholding tax. Denmark may therefore prove an attractive base for investments to and from China.

Through our Chinese Desk in Copenhagen and our representative office in Shanghai, Bech-Bruun has obtained significant experience advising both European and Chinese clients.

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