An agreement for the avoidance of double taxation is in place between Singapore and China. The initial treaty was signed between the two jurisdictions in 1986. The current version of this agreement was concluded in 2007 and was subject to a number of protocols that were signed afterward. The main differences between the old version and the updated one, which is in force, concerning the taxation of dividends, namely the withholding tax rate that was reduced. The same reduction of the withholding tax also applies to royalties. The treaty is a useful instrument that facilitates the trade flow between the two Contracting States through the actual elimination of the double taxation on income.
Businesses that venture from one country to the other benefit from the provisions of this treaty in terms of reduced withholding tax rates and a single taxation point for profits derived in one of the locations. The treaty stipulates the manner in which the two states have the right to impose the taxes on income derived from that jurisdiction and how cross-border income is treated.
The treaty also serves as an instrument for enforcing anti-fiscal evasion practices. An accountant in Singapore can help you if you are a foreign investor from China looking to expand a business here. With the help of an expert, you will be able to use the tax benefits provided in the double tax treaty.
Tax residency under the Singapore – China double tax treaty
One of the main conditions for the double taxation agreement between Singapore and China to be imposed is for those applying for the benefits provided by such a convention to comply with the residency requirements. These conditions apply to both natural persons and companies in Singapore and China.
The treaty provides for the following requirements in terms of residence:
- a resident of a contracting state is considered any person or business that has a residence, domicile, management or head office in the respective country;
- if a person or company is a resident of both countries, the state in which his/her permanent home, respectively incorporation address is will be deemed as a residence place;
- where the situation remains unclear, the place where the person or company has closer economic ties with will be considered as a residence place;
- if other conditions apply, the contracting states will reach an agreement with respect to the particularities of the case.
If you need advice on the residency requirements applicable in the city-state, our accountants in Singapore can offer detailed information. We can also assist in filing various financial statements with the Inland Revenue Authority of Singapore.
What are the taxes covered by the double tax treaty?
The double tax treaty between Singapore and China (DTA) applies to individuals and/or companies that are residents of one or both countries. In the case of China, the treaty applies to the individual income tax and the corporate income tax.
In Singapore, the double tax treaty applies to the income tax, but also to any other taxes that are identical to or similar and are imposed after the signature date of the treaty (also applicable to China).
According to the agreement, both countries must notify one another of any relevant changes in their taxation policies. The treaty applies to those income taxes imposed by both states, irrespective of the manner in which they are levied.
Our team of accountants in Singapore can help entrepreneurs verify the types of income to which this tax treaty applies. We can also help with comprehensive information about Singapore’s tax treaty network.
What are the general conditions for the Agreement?
The Agreement for the avoidance of double taxation between Singapore and China defines the types of establishments for which it applies. A person is an individual or any other body of individuals while a company is a corporate entity that is treated as such for taxation purposes in either of the two Contracting States. As far as the competent authorities under the Agreement, these are the Minister of Finance for Singapore and the State Administration of Taxation for China.
For the applicability of the treaty, an individual or a company is considered a resident in the following cases:
- it has a permanent establishment: he has a permanent home or establishment in one of the States.
- it has a habitual abode: when a clear permanent home or office cannot be established, the resident state will be that in which the individual/legal entity has a habitual abode.
- national: when the previous condition cannot apply, the residency will be determined based on nationality.
- other means: when the residency cannot be established through these means that the competent authorities’ names above will determine this matter by mutual agreement.
The Agreement also defines the term permanent establishment, for the purpose of taxation in the two jurisdictions. This can be a place of management, a branch or office, a factory or workshop or mine, gas or oil well, quarry or another location from which natural resources are extracted. Likewise, the term can also refer to building or construction sites where activities are performed for a period of maximum of six months.
The Agreement will not apply to the following types of permanent establishments:
- storage facilities;
- stocks or goods that are processed by another company
- a fixed place of business used for collecting information or that has an auxiliary character.
The double tax treaty applies to income from immovable property, business profits, income from shipping and air transport activities, income derived by associated enterprises, dividends, interest and royalties, capital gains, independent and dependent personal services, director’s fees as well as income derived by sportsmen and artists, students and trainers, along with income from pensions.
What are the benefits for investors under the Singapore – China DTA?
The withholding tax rates are reduced under the double tax treaty between Singapore and China. The dividend rate is reduced to 5% from the applicable rate for those companies owning at least 25% of the share capital of the company making the dividend payment. The withholding tax on royalties is also reduced, from 10% to 6%.
The agreement includes a non-discrimination clause that allows nationals to be protected from a more burdensome taxation regime in the other contracting state. The taxation of a permanent establishment in one contracting state, belonging to an enterprise resident of the other state shall not be performed in a less favorable manner.
An accountant in Singapore can help you with detailed information about the reduced withholding tax rates on dividends and royalties.
The double tax treaty applies to income derived from a number of sources, including that from immovable property, business profits, director’s fees, and certain special profits.
The double tax treaty between Singapore and China will continue to facilitate bilateral trade and encourage companies to engage in cross-border activities, including financial activities and the share of technical know-how.
Investors from China who are interested in knowing more about this treaty can consult the legal and tax provisions set forth about the Ministry of Finance and the Inland Revenue Authority of Singapore.p
Permanent establishments under the tax agreement with China
One of the first chapters of the double tax treaty between Singapore and China refers to the status of permanent establishments of companies registered in one of the contracting states and operating in the other. Even if all Singapore double tax treaties contain such provisions, it is important to note that each agreement is different and contains specific regulations to the status of foreign companies operating in Singapore.
Under the Singapore – China double taxation convention, a permanent establishment covers:
- a place of management of a Chinese company in Singapore;
- a branch office of a Chinse company in Singapore;
- an office or a factory of a Chinese company in Singapore;
- a workshop, construction site, mine, oil or gas well of a Chinese company in Singapore.
Such operations completed by Singapore companies in China are also deemed permanent establishments. A mandatory condition for a company to be considered a permanent establishment is for it to complete its activities for a minimum period of 6 months in China or Singapore. Also, where such an establishment provides services and has employees and personnel in the other country, the minimum period required is 6 months within a total period of 12 months.
Our accounting firm in Singapore is at your service with tailored consultancy with respect to the conditions that must be met in order to be considered a permanent establishment and take advantage of the provisions of a double tax agreement.
Another important aspect covered by the double tax treaty between Singapore and China refers to associated enterprises. The best-known types of such enterprises are holding companies. Under the agreement, an associated enterprise is considered a company that participates in the management or has an interest in a business in the other state. In this case, each company is taxed in its home country, however, if other arrangements have been made, the authorities in both countries can reach a specific agreement in the case of such enterprises.
You can rely on our accounting firm in Singapore for details on the taxation of holding companies. We also invite you to watch our video below:
Taxation of different types of profits
As mentioned earlier, the main purpose of a double tax treaty, such as the one between Singapore and China is to avoid the taxation of similar incomes in two different states. The most common incomes generated by companies and individuals are profits arisen from business operations, real estate ownership, employment and other incomes, such as interests, dividends and even intellectual property rights.
In the case of business profits, companies will be taxed in their home countries, unless they complete their activities through permanent establishments in China or Singapore. When it comes to income generated by real estate in the other contracting state, the tax will be imposed in the country where the property is located. This stipulation in the Singapore – China double tax treaty also applies to income obtained from agricultural and forestry-related activities.
When it comes to profits earned from interest, royalties and dividend payments, special reduced rates apply, as it follows:
- a 5% rate applies to dividend payments where the beneficial owner is a business that owns at least 25% of the capital in the enterprise paying the dividends;
- in all other cases, dividend payments are taxed at a rate of 10%;
- income derived from interests issued by a bank or financial institution is taxed at a rate of 7%;
- in all other cases, interest payments are taxed at a rate of 10%;
- royalties payments are subject to a 10% reduced rate.
For more information and details about this treaty, as well as general taxation matters, you can contact our experts. We also provide a wide range of accounting services in Singapore, tailored to the needs of local and foreign investors, according to company size, number of employees and other criteria.