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China – New Double Taxation Agreement With France.

24 March, 2014


Legal News & Analysis – Asia Pacific – China – International Trade


On 26 November 2013, the People’s Republic of China (“PRC“) and France entered into a new Double Taxation Agreement (the “New DTA“). The New DTA is intended to replace the Double Taxation Agreement of 30 May 1984 (the “former DTA“).


The new DTA will become effective 30 days after the exchange of the relevant ratification instruments between the parties. At the earliest, the New DTA should therefore enter into force as from 1 January 2015.


The main notable features of the New DTA include in particular:


  • Dividend withholding tax rate is reduced to 5% rate for substantial shareholders;
  • Specific provisions have been inserted on dividends distributed by certain real estate investment vehicles (e.g. SIICs and SPPICAVs);
  • Provisions related to the taxation of capital gains on the disposal of shares in real estate and non-real estate companies have been strengthened;
  • New provisions on the tax treatment of sovereign funds have been introduced;
  • A general anti-avoidance clause has been inserted.


1. Dividend Withholding Tax


1.1 Current Situation


Under Article 9(2) of the Former DTA, dividends paid by a French company may benefit from a reduced withholding tax rate of 10% (vs. 30% under French domestic rules).


1.2 New DTA


Article 10(2) of the New DTA provides for reduced rate of 5% on dividends paid by a French company, where the beneficial owner of the dividends is a Chinese resident company (other than a partnership) that owns directly 25% or more of the share capital of the distributing company.


In other situations, and subject to the below, the applicable withholding tax rate remains unchanged (ie, 10%).


Notwithstanding the above, Article 10(6) of the New DTA provides that the above mentioned reduced rates do not apply to dividends distributed by a French real estate investment vehicle which (i) distribute annually the major part of its income and (ii) are exempt on their real estate income, if the beneficial owner of the dividends owns 10% or more of the share capital of the distributing vehicle. In this case, dividends distributed by the French real estate investment vehicle are subject to French withholding tax at the rate provided by French domestic law (ie, currently 30%).


This provision specifically addresses the situation of French listed and non-listed real estate investment companies or REITs (respectively sociétés d’investissement immobilier cotées (SIIC) and sociétés à prépondérance immobilière à capital variable (SPPICAV) in which Chinese resident investors may own a significant shareholding.


On the other hand, minority shareholders owning less than 10% in such French vehicles may still benefit from the reduced rate of 10% under the New DTA.


2. Withholding Tax On Interest And Royalties


2.1 Current Situation


Under Articles 10(2) and 11(2) of the Former DTA, interest and royalties (as defined) paid to a Chinese tax resident may be subject to withholding tax in France at a rate that cannot exceed 10%.


2.2 New DTA


The applicable rate under the New DTA remains unchanged (ie, 10%).


That being said, it is worth noting that under French domestic rules, no withholding tax generally applies to interest paid outside France (unless paid in a so-called non-cooperative jurisdiction).


3. Capital Gain Tax On The Disposal Of Shares


3.1 Shares In Real-Estate Companies


3.1.1 Current Situation


Under Article 12(4) of the Former DTA, capital gains on the disposal of shares in a French real estate company, ie a company the assets of which mainly comprise, directly or indirectly, real estate located in France, can be taxed in that latter jurisdiction.


Under French domestic rules, such capital gains give rise to capital gain tax (“CGT“) at a rate of 33.1/3%.


3.1.2 New DTA


Under Article 13(4) of the New DTA, capital gains on the disposal of shares in French real estate companies remain taxable in France.


However, the definition of “French real estate companies” is broadened as it now includes any company, trust or any other institution or entity the assets of which consist, at any time during the 36-month period preceding the disposal, for more than 50% of their value or derive more than 50% of their value of French real estate, directly or indirectly through the interposition of one or more companies, trusts, institutions or entities.


3.2 Shares In Non-Real Estate Companies


3.2.1 Current Situation


Under Article 12(5) of the Former DTA, capital gains on the disposal of shares in a French non-real estate companies may be taxed in France if the shareholding that is disposed of represents 25% or more of the share capital of the French company (“substantial shareholding“).


Under French domestic rules, such capital gains realized by non-resident taxpayers may be subject to a 45% CGT, withheld at source upon the disposal.


It is worth noting that this CGT regime is by far less favourable than the one applicable to French corporate taxpayers.


As a matter of fact, under French domestic rules, capital gains on the disposal of certain shares in non-real estate companies (ie, shares that qualify as “investment shares” and that have been held for at least 2 years at the time of the disposal) can be exempt up to 88% of their amount (ie, effective CGT rate of around 4%).


This exemption also applies, subject to certain conditions, to corporate taxpayers resident in other EU jurisdictions or in EEA countries. On the other hand, the French tax authorities consider that such exemption cannot be extended to other jurisdictions, although this position may be questionable having regard to the EU principle of free movement of capital and to non-discrimination clauses contained in DTAs entered into by France (and in particular, Article 23(1) of the Former DTA and Article 25(1) of the New DTA).


3.2.2 New DTA


As per the Former DTA, capital gains on the disposal of a substantial shareholding in a French company remains taxable in France.


Conversely, capital gains realized by French corporate shareholders on the disposal of shares in Chinese companies will be taxable in PRC (at the rate of 10%, pursuant to PRC’s domestic laws).


However, the definition of “substantial shareholding” is broadened as it now encompasses capital gains realized upon the disposal of shares in a French non-real estate company where the seller has owned, directly or indirectly, 25% of the share capital in the French company at any time during a 12-month period preceding the disposal.

4. New Provisions Regarding Sovereign Funds


Article 5 of the Protocol to the New DTA provides that subject to capital gains on the disposal of French real estate and shares in French real estate companies, dividends, interest and royalties derived in France by a Chinese sovereign fund are not taxable in France.


Chinese sovereign funds are defined as funds created and entirely owned by the PRC. It specifically includes China Investment Corporation but the New DTA provides that such qualification may be extended to any similar institution agreed upon by France’s and PRC’s governments.


Capital gains related to French real estate are specifically excluded and remain therefore taxable in France in accordance with French domestic rules. In this respect, it is worth noting that the latter provide for a specific exemption from CGT for foreign sovereign funds that may be granted subject to the obtaining of a prior ruling from the French Finance Ministry.


However, such ruling is entirely discretionary and it seems that the current practice of the French authorities is to exclude the benefit of such exemption for the real estate sector (at least outside social housing or regulated rental sectors).


5. Insertion Of A General Anti-Avoidance Provision


The New DTA introduces a general anti-avoidance provision.


Article 24 of the New DTA denies the benefits of the treaty provisions (exemption or reduction of the applicable withholding tax rates) where transactions principally aim at securing the benefits of these provisions contrary to their purpose.


herbert smith Freehills


For further information, please contact:


Jean-Luc Calisti, Partner, Herbert Smith Freehills

[email protected]


Karen Ip, Partner, Herbert Smith Freehills

[email protected]


Jérôme Le Berre, Herbert Smith Freehills

[email protected]


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