China has approved the Multilateral BEPS Convention

25 May 2022 saw China submit its instrument of approval for the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting” (Multilateral BEPS Convention) to the OECD. The approval of the Multilateral BEPS Convention contains the list of reservations and notifications made by the Chinese government, which becomes effective from 1 September 2022.

Position of mainland China

According to the submitted instrument of approval, China has adopted two kinds of BEPS measures:

1. Minimum standards of BEPS measures (such as dual resident entities, principal purpose test for the prevention of treaty abuse, etc.);
2. Non-mandatory measures that China has already adopted in the double taxation agreements (“DTA”) signed in recent years.

Below is the summary of China’s position:

Principal purpose test

China has adopted the principal purpose test articles stipulated in Article 7, namely the “Prevention of treaty abuse”. The tax treaty benefit could be refused, if obtaining the tax treaty benefit was one of the principal purposes of any arrangement or transaction. It is therefore crucial for companies to check and review upfront whether an arrangement or transaction has reasonable commercial purpose and business substance.

Avoidance of permanent establishment status

China has not adopted all the articles regarding the avoidance of permanent establishment status (Article 12 to Article 15). The Chinese tax authorities will continue to apply the DTA articles and domestic rulings (such as Guoshuifa [2010] No. 75) for the permanent establishment assessment.

Effective date of the Multilateral BEPS Convention to double taxation agreements

The Multilateral BEPS Convention affects the DTAs depending, in terms of the latter, on when the tax treaty parties have enforced the Multilateral BEPS Convention. As of 30 June 2022, the enactment procedures for the Multilateral BEPS Convention have been completed for 47 DTAs out of 100 adopted DTAs.

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