The chairmen of the cross-straits associations from Taiwan and mainland China recently signed a double taxation agreement (the Agreement) that, when ratified, will accord certain preferential treatment to taxpayers from each jurisdiction receiving income from the other jurisdiction, including reduction of withholding on qualifying dividends to 5%, interest to 7%, royalties to 7% and capital gains to zero.
The Agreement also provides that 1) where the effective management of a company incorporated in a third party jurisdiction (e.g., Hong Kong) is located in one of the contracting jurisdictions (i.e., Taiwan or the mainland), the company can be recognized as a tax resident of that contracting jurisdiction, 2) business profits from income tax in the other jurisdiction are exempt from income tax unless a permanent establishment is created (e.g., by providing services in that other jurisdiction for 183 days or more in a 12 month period, and 3) qualifying employees and personal services providers are exempt from income tax in the other jurisdiction unless they work there for 183 days or more in a 12 month period.
The Agreement, Agreement on Avoidance of Double Taxation and Improvement of Tax Cooperation across the Taiwan Straits, provides that it will enter into force after it is ratified by both sides, and will apply retroactively to income derived from January 1 of the year in which it is ratified. Although it could be ratified by year-end, thus becoming effective from January 1, 2015, ratification may also be delayed until after December 31, in which case it would only become effective in 2016.
In order to qualify for the preferential 5% withholding rate on dividends, the recipient must hold at least 25% of the equity in the company in the other jurisdiction paying the dividends. The zero rate on capital gains applies to a transfer of shares unless 1) the transferee company in the other jurisdiction is ”[immovable] property-rich”, or 2) the transfer is exempt from taxation in the transferring company’s jurisdiction and the transferring company holds or has held 25% or more of the equity of the transferee company at any time in the 12 months preceding the transfer. The Agreement includes and anti-treaty abuse clause, a mechanism to enhance cross-strait communications and collaboration.
While reducing tax rates for certain items, especially for mainland companies deriving income from Taiwan, in the HR context, the agreement is notable in that it will implement treaty-like treatment of individual multinational employees with Taiwan residence who are transferred to work in the mainland, including 183 day treaty protection.