New tax treaty with China

Background: The need for a new tax treaty

Norway and China have agreed on a new tax treaty. The Government has submitted a proposal requesting the National Parliament’s consent for the new treaty to enter into force.

The current tax treaty between China and Norway dates from 1986. There have been extensive changes in the legislation of both countries, and internationally, new initiatives – in particular the OECD's BEPS project – have highlighted the need for a more up-to-date tax treaty. Older tax treaties are therefore no longer in line with today's requirements.

Main changes in the new treaty

The new tax treaty largely follows the OECD model treaty and contains several BEPS-related provisions. An important new feature is a separate clause against abuse and circumvention – this is to strengthen the measures against tax evasion.

The new tax treaty applies the credit method as the main method for avoiding double taxation. Furthermore, the withholding tax rate on dividends has been reduced from 15 percent in the current treaty to 5 or 10 percent in the new one, depending on the situation.

Preamble and main purpose

The preamble to the new tax treaty has also been significantly amended. The main purpose of the tax treaty is still to avoid double taxation, but now the desire for closer economic cooperation and exchange of information is also emphasised. It is intended to limit the opportunities for non-taxation and reduced taxation through tax evasion and avoidance. The preamble is followed up in Article 26 (exchange of information) and Article 27 (entitlement to benefits) of the tax treaty.

Wealth tax and geographical connection

It is worth noting that wealth tax is not covered by the tax treaty (cf. Article 2). The reason for this is that China does not impose wealth tax, and therefore there will be no double taxation in this area. The consequence of wealth tax not being covered by the tax treaty may be that taxpayers may be subject to wealth tax under Norwegian rules even if they are resident in China under the tax treaty. This means that emigration and immigration must be assessed separately under Norwegian domestic law.

Rules on permanent establishments

The definition of "permanent establishment" in Article 5 has undergone some important changes that are relevant for companies operating in both countries. The provision is based in part on the UN and OECD model convention. According to the OECD model treaty, a construction project will establish a permanent establishment if the project lasts more than 12 months. In the current treaty, such a project will constitute a permanent establishment if the project lasts more than 6 months, but this has now been changed to 12 months in line with the model convention.

Service activities may establish a permanent establishment if the service is performed for a period exceeding a total of 183 days during any 12-month period.

Arm's length principle and corresponding adjustment

Article 9 includes a provision on associated enterprises. Under domestic law, the Norwegian tax authorities are authorised to determine income by assessment if income is reduced due to a common interest (the "arm's length principle"). This principle now follows from Article 9 of the tax treaty, but a provision on corresponding adjustment has also been included. If, for example, Norway increases taxable income under Norwegian rules, China is obliged to make a corresponding adjustment ("appropriate adjustment") to avoid double taxation. In practice, this is an important change because it provides clarification.

Dividend taxation under the new treaty

The dividend provision contains detailed rules on the source state's right to tax dividends. The main rule in the current treaty is that the source state cannot impose more than 15 percent withholding tax. In the new treaty, the maximum percentage has been adjusted downwards to 10 percent. There is also a special rule of 5 percent under specific conditions.

Special provisions on offshore activities

The other provisions on the allocation of tax bases largely follow the model convention. The provisions on the continental shelf deviate from the model convention but follow the principles that Norway has in other tax treaties where activities on the continental shelf are regulated.

Rules on the avoidance of double taxation

The important provision on the avoidance of double taxation in Article 23 is based on the credit method. Article 23(2)(b) includes a progression clause. If a taxpayer is resident in Norway and receives income that is exempt from Norwegian taxation under the treaty, the income may nevertheless be included in the tax base. In the calculated Norwegian tax, a deduction shall be granted for an amount corresponding to the total Norwegian tax attributable to the income earned in China. The deduction in Norwegian tax shall therefore be made using a calculated amount, regardless of whether this amount is higher or lower than what is actually paid in China.

Significance for business

It is very positive that there is now a new and updated tax treaty with China. When the treaty enters into force, it will be more up to date and adapted to the changes that have taken place since the 1980s. China is one of our largest trading partners, and it is a clear advantage that the tax treaty is now being updated. Hopefully, there will be a similar update of the tax treaty between Norway and the United States. The existing treaty between Norway and the United States is long overdue for an update.