The new Agreement between the Spain and the People’s Republic of China was published in the BOE (State Official Gazette) on 30 March 2021. Its date of entry into force is 2 May 2021 and shall, as a general rule, become effective as of 1 January 2022.
This new Agreement introduces important tax developments compared with its previous version, with the aim of promoting economic exchange between the two States and facilitating cooperation between the two tax authorities.
It will have a significant impact on taxation of investments between the two countries, as it significantly reduces the tax burden on profits generated through shareholdings in companies resident in the other country. It will therefore be essential that individuals and companies review the taxation of their investments in the light of the new tax framework included in the new Agreement.
As new developments for Chinese companies and citizens establishing in Catalonia, we would highlight the following:
- Taxation on dividends is substantially improved by introducing a new reduced rate of 5% (applicable in cases where the beneficial owner of the dividends holds at least 25% of the capital of the paying company for one year) and a new exemption (applicable to public companies, central banks and similar institutions). For the other cases, the general rate of 10% is maintained.
- The mechanisms for eliminating double taxation are developed in greater detail, increasing the necessary shareholding in cases of dividend payments to Chinese companies with a shareholding of at least 20% (previously 10%), which will allow the Chinese company to deduct the tax paid in Spain by the Spanish company distributing the dividends.
- The exemption as a method of avoiding double taxation of income earned in China by persons resident in Spain is eliminated. Double taxation will in any case be eliminated through the allocation method, with deduction of both the input tax directly in China and, in the case of dividends, the Chinese tax on the profits from which the dividend is paid.
- Capital gains arising from the transfer of shares in companies with a real estate basis, whether direct or indirect, may be taxed, in addition to in the country of residence of the transferor, in the country where the real estate is located.
- The same applies to gains arising from the transfer of interests in entities in which the transferor held, directly or indirectly, a shareholding of at least 25% at any time during the year preceding the transfer.
- Similarly, capital gains arising from the transfer of shares in listed entities may be taxed in the State in which the transferor is resident and also in the country in which the entity is resident if the total of the shares disposed of in the year does not exceed 3% of the value of the listed shares.
- As a general rule, interest and royalties shall be withheld at the rate of 10% of their gross amount when they are paid to a resident of the other country.
- The minimum time to consider that a Chinese taxpayer has a permanent establishment in the other country as a result of construction, installation or assembly works is extended from 6 to 12 months.
- The minimum shareholding that a company resident in China must hold in a Spanish company paying dividends is increased to 20% as a condition for avoiding double taxation in China.
- New rules on the limitation of profits are established to ensure the correct application of the Agreement and the exchange of information between the two countries is strengthened.
Tomás Lamarca, Tax Partner at Net Craman Abogados
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