As briefly indicated in our October column, on 25 September 2013 the new Sino-Swiss double taxation treaty (DTA) on income taxes was signed. It will replace the existing 1991 treaty and is, once ratified, expected to come into effect on 1 January 2015.
Exchange of information
As one of the key points, the new Sino-Swiss DTA implements the international Organisation for Economic Co-operation and Development (OECD) standard on the exchange of fiscal information.
This important step will improve transnational transparency with regard to fiscal matters, and will allow both countries to request information – for example, from banks, governmental bodies or corporations – needed for the assessment of a taxpayer in the requesting state.
Under the new Sino-Swiss DTA the maximum withholding tax on dividends will be 5%, if the beneficiary of the dividends is a company – other than, due to fiscal transparency, a partnership or individual – resident in the other treaty state and directly holding at least 25% of the capital of the dividend-paying company. This measure aims to further reduce the double taxation for transnational affiliate companies. In all other cases, dividends will be taxed at a maximum rate of 10%, as is the case under the current DTA from 1991.
If the beneficial owner of the dividends is the other contracting state itself, a political subdivision, the central bank, or a local authority including institutions and funds agreed on by the two contracting states, a full relief from withholding tax will be provided. In the case of China, such institutions include the China Investment Corporation (CIC) and the National Council for Social Security Fund.
In China, royalties paid by a Chinese company to a Swiss individual or company will be subject to a withholding tax rate of 9% – versus 20% for individuals and 10% for companies domiciled in countries without treaty. Hence, the new Sino-Swiss DTA will reduce the royalty withholding tax rate from 10% to 9%.
As Switzerland levies no withholding tax on royalties, the treaty benefits primarily Chinese companies.
The new Sino-Swiss DTA will not provide for lower withholding tax on interest payments than the existing treaty, the maximum withholding tax on interest payments remaining at 10%. Nevertheless, Switzerland does not impose withholding tax on regular loans, other than on interest paid by a bank or interest on bonds taxed at, without double tax treaty, 35%. As with regard to dividend payments, no withholding tax will be imposable on interest paid to the contracting state, one of its subdivisions, or a state-owned agency.
International transport services
The new Sino-Swiss DTA will exempt Swiss international operators of ships or aircraft from Chinese business tax and value-added tax (VAT) and for them the input tax attributable to supplies will be creditable to the same extent as for Chinese companies. The same applies vice versa for Chinese shipping companies and airlines. We expect that this important tax relief will increase Sino-Swiss travel and business activities.
The HK-Swiss DTA
The 2012 treaty between Switzerland and Hong Kong for the avoidance of double taxation with respect to income taxes. The DTA between Switzerland and Hong Kong came into force on 15 October 2012 and also implemented the international OECD standards on exchange of information. The Hong Kong–Swiss DTA entered into effect for Switzerland on 1 January 2013 and for Hong Kong on 1 April 2013. No DTA between Hong Kong and Switzerland existed prior to the current treaty.
Under the Hong Kong-Swiss DTA, dividends are taxed at a maximum rate of 10%, but dividends to affiliate companies – other than to partnerships or individuals – in the other contracting party holding at least 10% of the dividend payer are exempt. The same rule applies for payments to pension funds or pension schemes, to the Hong Kong Monetary Authority and to the Swiss National Bank, respectively.
However, according to domestic tax law, dividends paid by a Hong Kong entity are exempt from any withholding tax. Therefore, the Hong Kong-Swiss DTA provision benefits mainly Hong Kong investors investing in Switzerland.
Interest will only be taxed in the country of residence of the beneficial owner. Since Hong Kong does not impose any withholding tax on interest payments, the beneficiaries of this provision are creditors resident in Hong Kong investing in Swiss bonds.
Under the Hong Kong-Swiss DTA, the tax authorities of both countries may levy withholding tax on royalties at a maximum rate of 3%. As according to Hong Kong domestic tax law royalty payments to non-residents are taxable at an effective rate of 4.95%, or 16.5% for companies and 4.5% or 15% for individuals – depending on the beneficiary and the original owner of the intangibles – the Hong Kong-Swiss DTA significantly reduces withholding taxation of royalties paid from Hong Kong to Switzerland.
As mentioned previously above, Switzerland levies no withholding tax on royalty payments.
As the Swiss-Hong Kong DTA did for Hong Kong-Swiss investments, the new Sino-Swiss DTA will improve tax efficiency of Sino-Swiss investments. For Swiss investors, it will in particular no longer be necessary to structure their mainland investments via Hong Kong – often difficult for conduit rules – to avail themselves of 5% withholding tax on dividends.
Christoph Niederer is partner and the head of the tax team at the Swiss law firm VISCHER, and Wu Fan is counsel at VISCHER
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吴帆 Wu Fan
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