Dividend distribution under the new Sino-German DTA

Last updated on 26 October 2017

The new Double Taxation Agreement (”DTA”) between Germany and China becomes effective from January 1, 2017. One of the most concerned issues is that for profit distribution from a subsidiary in which a company holds more than 25% of its shares, the withholding tax is reduced from 10% to 5% (not applicable to companies whose legal form is KG).

In tax practice, the long-debated issue, whether the reduced withholding tax rate for the distribution of dividends will also apply for profits generated before 2017 but distributed after January 1, 2017, has been settled. Those profits generated before 2017 are entitled to the preferential tax treatment, as long as the shareholders’ resolution regarding the dividend distribution is issued after January 1, 2017. In practice, if overpaid taxes exist, taxpayers should communicate with local tax authorities timely and apply for tax refunds.
 

Normal procedures for profit distribution

• Apply tax treaty benefits to tax authorities with required documents (Power of Attorney, Information Reporting Form of Tax Residence Status of Non-resident Taxpayer, Reporting Form for Non-resident Taxpayer Claiming Tax Treaty Benefits, Shareholder Resolution regarding Profit Distribution, Contract Record Filing Form, Certificate of Tax Residence Status of Foreign Shareholder and the corresponding Chinese translation as well as other supporting documents as required.);
• Tax declaration and tax payment;
• Online filing for outbound payment and receipt of filing form for outbound payment issued by tax authorities;
• Remit dividend in bank with provision of required documents (tax record filing for outbound payment, shareholder resolution, tax payment certificate, audit report, capital verification report, etc.).
   

Details to be noticed

For the application of tax treaty benefits, the required documents by tax authorities vary from provinces. Taking Jiangsu Province for instance, some tax authorities may require detailed documents from a non-resident taxpayer (shareholder) to prove its status as ”beneficiary”, including group organization structure, articles of association, financial statements/audited reports, company structure of departments and personnel, proof of ownership of premises or rental agreement, statement regarding function performed and risks borne in investment and management by shareholder, record of latest board meeting, etc.
 

It is usual that the dividends to be distributed are agreed in RMB in the shareholders’ resolution and the remittance will be proceeded in RMB or in foreign currency equivalent to the agreed amount of RMB. As a result, the amount in contract record filing is generally settled in RMB. But in practice, if the record filing documents are settled in RMB, banks will require subsidiaries to remit dividends to the RMB bank accounts of their shareholders. If the currency is inconsistent, banks may reject the payment. In most case, overseas shareholders do not have a RMB account to receive the dividends in RMB. This problem has been more frequent lately due to the change to use the online registration system. Therefore, it is suggested to communicate with banks in advance to confirm whether the above issue exists while preparing shareholders’ resolution. Moreover, the amount of the profit distribution should be stated in the shareholders’ resolution in both RMB and foreign currency, whereby the foreign currency should be used in the filing.
 

Furthermore, withholding taxpayers could also be requested in practice by tax authorities to declare the withholding tax within 7 days after completing the contract record filing procedures. If contract record filing and treaty benefit application cannot be completed at the same time and the withholding taxpayer must declare the withholding tax within 7 days, tax rate of 10% will be applied firstly. After the treaty benefit is approved, overpaid tax of 5% will be refunded by tax authorities. Since this requirement is not common but did actually happen in practice, it is suggested that taxpayers should communicate with competent tax authorities in advance to avoid tax penalties resulted from the delayed tax declaration.