SR 1986/314
Issued
01 Feb 1987

Double Taxation Relief (China) Order 1986

Archived legislative commentary on Double Taxation Relief (China) Order 1986 from PIB vol 112, suppl 15 Feb 1987.

This commentary item was published in Public Information Bulletin Volume 112, Supplement No. 15, February 1987.

More information about Public Information Bulletins.

Double Taxation Convention With China

Part I - Introduction

The text of the Agreement has been published as a schedule to an Order in Council (SR 1986/314) which has been distributed to district offices and is available to the public from Government Bookshops.

In reading or referring to this supplement, please ensure that it is read in conjunction with the text of the Agreement using the defined terms correctly where they apply. Do not read any previous DTCS's in respect of other conventions or agreements when applying this Agreement.

The Agreement came into force on 17 December 1986 with effect in New Zealand for any income year beginning on or after 1 April 1987.

In China it takes effect in respect of income derived during the taxable year beginning on or after 1 January 1987.

NB The agreement is generally drafted in accordance with the 1977 OECD Model Double Taxation Convention. The notes and commentaries in the OECD booklet "Model Double Taxation Convention on Income and Capital" are therefore useful resource material in understanding the application of the Agreement. Care should be taken to identify differences in the text of the Agreement from those in the OECD Model when using those notes and commentaries as an aid in the interpretation or application of this new Agreement with China.

Part II - Notes on the Agreement Article by Article

Article 1 - Personal scope

The Agreement applies to persons who are residents of New Zealand or China or of both States.

Article 2 - Taxes covered

The Agreement covers the following taxes imposed by China:

  • the individual income tax;
  • the income tax concerning joint ventures with Chinese and foreign investment:
  • the income tax concerning foreign enterprises; and
  • the local income tax.

In New Zealand the Agreement covers income tax and excess retention tax.

Article 3 - General definitions

1. Paragraph 1 groups together various general provisions required for the interpretation of terms used in the Agreement.

"National": Paragraph 1(h)

The term "national" is used in paragraph 2(c) and 2(d) of Article 4 in determining residence status. It is also used in Article 19 Government Service and Article 24 Non-Discrimination.

In New Zealand the term covers any individual who is a New Zealand citizen and any legal person or other entity deriving its status as such from the law in force in New Zealand.

In China the term covers all individuals possessing the nationality of China and all juridical persons created or organised under the laws of China as well as any organisations without juridical personality treated for tax purposes as Juridical persons so created or organised.

2. Paragraph 2 is a standard provision. Where a term is not defined it has the meaning applicable under the domestic law of the country applying the Agreement.

Article 4 - Residence

1. Paragraph 1 defines the meaning of the term "resident of a Contracting State". In effect the defined term is a reference to the domestic law of each country. Whenever the term is used in the Agreement, the residence of the taxpayer must first be determined in accordance with this Article.

2. Paragraph 2 sets out the tests to be applied to solve the problem of a dual resident individual. Dual residence arises when a taxpayer is resident in both countries by virtue of the domestic law of each country.

3. Paragraph 3 provides that where a company or other legal person is resident in both countries, residence will be where the place of head office of the enterprise is situated. In this context, New Zealand views the term "head office" as meaning the centre of its administrative management.

In applying the tests to dual residents, as set out in paragraphs 2 and 3, it should be remembered that these tests apply only for the purposes of the Agreement. If the person resident in New Zealand (domestic law test) becomes for the purposes of the Agreement a "resident of China" after the tests have been applied, this does not mean that he is regarded as a non-resident for all purposes of New Zealand tax law. For example, he can never be subject to non-resident withholding tax, the reason being that although he is treated as a non-resident for certain purposes of the Agreement, he is still regarded as being resident in New Zealand under the Income Tax Act. However, it does mean that he is entitled to any benefits granted by the Agreement as a "resident of China". For example, although New Zealand royalty income derived by him is not subject to non-resident withholding tax, he is liable for New Zealand income tax on the royalty income but qualifies for the 10 percent limitation in the Agreement.

Article 5 - Permanent establishment

The Article defines the term "permanent establishment". This concept determines the right of a Contracting State to tax the profits of an "enterprise of the other contracting State". Due to the inclusion of the words "includes especially" in paragraph 2, the examples cited as constituting a permanent establishment are by no means exhaustive.

The definition of "permanent establishment" is fairly standard, however the following points should be noted:

Article 6 - Income from Immovable Property

This Article recognises the internationally accepted practice in relation to income from land or landed property. The Article also applies to such items as rents, natural resource royalties, farming and forestry profits, etc. The principle of the Article is that income derived by a resident of one State from immovable property situated in the other State may be taxed in the State where the immovable property is situated. "Immovable property" is not defined in our general law but the Article provides extensive definition. Ships and aircraft are excluded from the term "immovable property".

The Article involves no change in current practice in relation to the income covered, ie, our domestic law applies.

Article 7 - Business Profits

This Article is in many respects a continuation of, and a corollary to, Article 5 on the definition of the concept of permanent establishment. Under Article 7 a Contracting State cannot tax the business profits of an enterprise of the other Contracting State unless it carries on its business through a permanent establishment situated therein. If a permanent establishment exists the Article goes on to lay down a set of rules by which the profits of the permanent establishment are to be calculated.

Before dealing with the salient features of the Article some comment is warranted on the importance of paragraph 7. This is because reference to this Article and Article 5 will not always be necessary to determine the liability of specific types of income. In effect paragraph 7 gives first preference to the other Articles in the Agreement. It follows that this Article will only be applicable to business profits which do not belong to the categories of income specifically covered in other Articles of the Agreement and, in addition, to interest and royalties which specifically come within the circumstances detailed in paragraph 4 of Article 10 paragraph 5 of Article 11 and paragraph 4 of Article 12, and consequently fall within Article 7.

1. Paragraph 1 expresses the general rule that profits are taxable only in the country of residence unless the enterprise is engaged in business in the other country through a permanent establishment, in which case the other country may tax the business profits of the permanent establishment.

It is important to note that only income attributable directly to the permanent establishment's operations can form part of the establishment's operations. This does not mean that income which is not directly attributable to the establishment's operations escapes liability for tax. For example, the restriction on the rate of tax imposed by paragraph 2 of Articles 10, 11 and 12, would still apply if such income did not arise from the permanent establishment's operations.

2. Paragraph 2 contains the normal provision enabling arm's length profits to be attributed to the permanent establishment if necessary.

3. Paragraph 3 expresses the taxpayer's right to deduct from the profits of the permanent establishment the expenses incurred for the purposes of the permanent establishment even if those expenses are incurred outside the country where the permanent establishment is situated.

4. Paragraph 4 provides that where the profits to be attributed to a permanent establishment are determined, not on the basis of separate accounts or by making an estimate of arm's length profit, but simply by apportioning the total profits of the enterprise by reference to various formulae, then such a method may continue to be employed provided it has been customary to adopt such a practice. Such a method differs from those envisaged in paragraph 2 of Article 7, since it contemplates not an attribution of profits on a separate enterprise footing, but an apportionment of total profits. However, in general the profits to be attributed to a permanent establishment should be determined by reference to the establishment's accounts if these reflect the real facts. A method of allocation which is based on apportioning total profits is generally not as appropriate as a method which has regard only to the activities of the permanent establishment and should be used only where it has as a matter of history been customary in the past and is accepted by the Department and taxpayer as being satisfactory.

5. Paragraph 5 precludes the attribution of profits to a permanent establishment by reason of merely purchasing activities carried on by the permanent establishment for the enterprise.

6. Paragraph 6 provides that unless there are good and sufficient reasons to the contrary the profits attributed to a permanent establishment must be determined by the same method each year.

7. Paragraph 7: refer to initial comments above on this paragraph.

8. In terms of paragraph 1 of the Protocol income from the business of any form of insurance is not subject to the provisions of this Article. Such income may be taxed in accordance with the domestic law of each country.

Article 8 - Shipping and Air Transport

1. Under this Article profits from operating ships or aircraft in "international traffic" - defined in Article 3(1)(i) are to be taxed only in the country in which the place of head office of the enterprise is situated. This would normally be the place of residence. International shipping and aircraft profits include income from:

  • carriage of passengers and cargo;
  • sale of passenger tickets on behalf of other enterprises;
  • commercial advertising;
  • charter fees (but refer paragraph 4 below).

Due to the definition of "international traffic" exemption does not extend to profits derived from coastal traffic. Further, investment income of shipping and air transport enterprises is subject to the treatment ordinarily applied to that class of income, eg, dividends derived would be subject to Article 10.

2. Paragraph 2 concerns the case where the place of head office is aboard a ship. In this case tax will only be charged by the State where the home harbour of the ship is situated. It is provided that the home harbour cannot be determined, tax will be charged only in the Contracting State of which the operator of the ship is resident.

3. Paragraph 3 extends the provisions of paragraph 1 to profits derived by an enterprise as a member of a pooling agreement or similar kind of arrangement with other enterprises.

4. Profits obtained from leasing a ship or aircraft on charter fully equipped, manned and supplied, whether or not the enterprise providing the ship or aircraft actually owns them, would be treated as profits from the operation of a ship or aircraft. However, the Article does not extend to profits from leasing a ship or aircraft on a bare boat charter basis except when it is an occasional source of income for an enterprise engaged in the international operation of ships or aircraft. Apart from this one exception, bare boat charter fees would normally be classified as business profits and consequently dealt with under Article.

Article 9 - Associated Enterprises

This Article enables an arm's length profit to be attributed to associated enterprises.

Article 10 - Dividends

1. Paragraph 1 of the Article simply states that dividends may be taxed in the State of residence of the recipient.

2. Paragraph 2 provides that the Contracting State from which the dividends are paid also has the right to tax, but the maximum rate of tax that can be imposed is not to exceed 15 percent of the gross amount of the dividends. Therefore, in terms of the Agreement New Zealand's taxing rights will be restricted to 15 percent of the gross dividend even though the rate under our domestic law is 30 percent.

3. Paragraph 3 defines "dividends" for the purposes of the Article. The effect is that "dividends" has the meaning given to it by section 4 of the Income Tax Act 1976.

4. Paragraph 4 deals with dividends arising from shares which are attributable to a permanent establishment. It provides that in the State of source the dividends are taxable as part of the profits of the permanent establishment, provided they are paid in respect of holdings forming part of the assets of the permanent establishment or are otherwise attributable to that establishment. In effect this relieves the State of source of the dividends from the 15 percent limitation under the Article.

The rules set out above also apply where the recipient of the dividends has in the other State, for the purpose of performing any of the kind of independent personal services mentioned in Article 14, a fixed base with which the holding in respect of which the dividends are paid is effectively connected.

Prior to 1 April 1982 these qualifications would have had no effect on the New Zealand tax position because our domestic law provided for a 15 percent final withholding tax in all cases on the gross payment and no Agreement can extend the taxing rights under domestic law. However, in view of the change in the New Zealand domestic law from 1 April 1982 the New Zealand tax on dividends paid in respect of shares attributable to a permanent establishment will be 30 percent.

5. The main effect of paragraph 5 is that it restricts the application of taxes on undistributed profits. For example, New Zealand cannot impose excess retention tax on a privately controlled company which is a "resident of China".

Article 11 - Interest

1. Paragraph 1 affirms the taxing right of the State in which the recipient of the interest is a resident.

2. Paragraph 2 also affirms the taxing right of the State in which the interest arises but the maximum tax that can be imposed is not to exceed 10 percent of the gross amount of the interest. New Zealand's tax is therefore limited to 10% of gross interest paid to residents of China instead of the usual 15%.

3. Paragraph 3 exempts from tax interest arising in a Contracting State if:

  • it is derived by the government of the other State, a political subdivision or local authority thereof, the Central Bank of the other state or any financial institution wholly owned by the Government of the other State:
  • it is derived by a person who is a resident of the other State in respect of debt-claims of that resident which have been financed, guaranteed or insured by the Government of the other State, a political subdivision or local authority thereof, the Central Bank of the other State or any financial institution wholly owned by the Government of that other State.

In New Zealand the "central bank" is the Reserve Bank of New Zealand.

4. Paragraph 4 defines "interest" for the purposes of the Article. Penalty charges are excluded from the term as is income which would, because of a State's domestic law, be classified as a dividend. Therefore, in New Zealand, for example, interest received by debenture holders under debentures to which section 192 or 195 of the Income Tax Act 1976 applies would be dealt with under the Dividends Article.

5. Paragraph 5 provides that in the State of source interest is taxable as part of the profits of the permanent establishment there owned by resident of the other State, provided the interest is paid an respect of debt-claims forming part of the assets of the permanent establishment or otherwise attributable to that establishment. In effect this paragraph relieves the State of source of the interest from any limitation under the Article.

The rules set out above also apply where the recipient of the interest has in the other State, for the purpose of performing any of the kind of independent personal services mentioned in Article 14, a fixed base to which the debt-claim in respect of which the interest is paid is attributable.

These qualifications tie in with the New Zealand domestic law which provides that if a non-resident has a fixed establishment in New Zealand, then interest derived is not subject to non-resident withholding tax but is to be assessed on an annual basis.(Section 310 of the Income Tax Act 1976.)

6. Paragraph 6 is a source rule and precludes argument as to the source of the interest.

The paragraph deals with interest arising through a permanent establishment or fixed base. Where a loan is contracted for the requirements of that establishment and the interest as borne by that establishment, the paragraph determines that the source of the interest is in the Contracting State in which the permanent establishment is situated, leaving aside the place of residence of the owner of that establishment or base.

7. Paragraph 7 is an anti-avoidance provision to ensure that only a reasonable interest payment (eg, arms-length) is taxed at the reduced rate specified in the Agreement.

Article 12 - Royalties

1. Paragraph 1 affirms the taxing right of the State in which the recipient of the royalties is a resident.

2. Paragraph 2 also affirms the taxing right of the State in which the royalties arise, but the maximum tax that can be imposed is not to exceed 10 percent of the gross amount of the royalties. New Zealand's tax is therefore limited to 10 percent on gross royalties paid to residents of China instead of the usual 15 percent withheld. In New Zealand the limitation will be achieved by the payer of the royalties deducting withholding tax of 10 percent at the time of payment. In the case of royalties which are subject to annual assessment the tax will be limited to 10 percent of the gross payment.

3. Paragraph 3 defines "royalties" for the purposes of the Article. The term includes lump sum payments and certain rents. However, variable or fixed payments for the working of mineral deposits or other natural resources do not fall within the defined term as they are governed by Article 6.

It should be noted that if a payment is made in the form of rent rather than on a royalty basis and the payment comes within the term "royalties", as defined in the Agreement, then the 10 percent maximum on gross applies. However, rental payments do not constitute royalties under our domestic law and there is, therefore, no non-resident withholding tax applicable. Payments of this nature will be subject to an annual assessment on the net amount after expenses and if the tax so levied exceeds 10 percent of the gross rental, a rebate will be given by virtue of the Agreement to bring the tax down to 10 percent of gross.

4. Paragraph 4 provides that in the State of source royalties are taxable as part of the profits of the permanent establishment there owned by the recipient which is a resident of the other state, provided the royalties are attributable to that establishment. In effect this relieves the State of source of the royalties from the 10 percent limitation under the Article.

The rules set out above also apply where the recipient of the royalties has in the other State, for the purpose of performing independent personal services, a fixed base to which royalties are attributable.

New Zealand's domestic law in relation to royalties provides for a withholding tax rate of 15 percent final on copyright (cultural) royalties or where the aggregate annual royalty payments do not exceed $1,000, while a minimum final tax applies in all other cases.

5. Paragraphs 5 and 6 - the comments to paragraph 6 and 7 of the Interest Article apply equally here.

Article 13 - Alienation of Property

1. Paragraph 1 concerns gains derived from the alienation of immovable property. Gains from such alienation may be taxed in the State where the property is situated. For example, if a resident of China sells at a profit immovable property situated in New Zealand the profit can be taxed in New Zealand if the New Zealand domestic law permits that taxation.

2. Paragraph 2 deals with gains from the alienation of personal property forming part of the business property of a permanent establishment or pertaining to a fixed base used for performing independent personal services. Such gains may be taxed in the State where the permanent establishment or fixed base is situated.

3. Paragraph 3 provides that gains from the alienation of ships or aircraft operated in international traffic are taxable only in the State of which the place of head office of the enterprise is situated.

4. Paragraph 4 provides that gains from the alienation of any property other than that referred to in paragraphs 1-3 and arising in the other Contracting State may be taxed in that other State.

Article 14 - Independent Personal Services

1. This Article concerns income from personal services (ie, independent personal services) as distinct from income from dependent personal services (eg, remuneration such as salary or wages) which is dealt with separately under Article 15. Income from independent personal services is taxable only in the State of residence unless the services are performed in the other State and the recipient of the income:

  • has a fixed base regularly available to him in the other State for the purpose of performing his activities; or
  • is present in the other State for a period or periods amounting to or exceeding in the aggregate 183 days in any consecutive period of twelve months;

If either of the above exceptions applies the State in which the services are performed also has the right to tax the income therefrom.

The term "fixed base" is intended to cover a centre of activity of fixed or permanent character, for instance a doctor's consulting room or the office of an architect or lawyer.

2. The Article does not apply to artistes or athletes, who are dealt with under Article 17.

Article 15 - Dependent Personal Services

1. Paragraph 1 states the general rule that personal services performed by a resident of one of the Contracting States may be taxed in that other Contracting State, only if the services are performed in that other Contracting State.

2. Paragraph 2 states the case where exemption will be given by the State visited. The main requirements are that:

  • the recipient of the income is present in the State visited for a period or periods which do not exceed in the aggregate 183 days in any consecutive period of twelve months; and
  • the remuneration is paid by an employer not resident in that State; and
  • the remuneration is not connected with the activities of a permanent establishment or fixed base which the employer has in that State.

Regarding the 183 day test the term "consecutive period of twelve months" should be noted as the treatment effectively differs from the term "income year" which is used in other treaties.

Where the term "income year" is used for the purposes of the 183 days test each income year is looked at separately in determining the number of days present. Therefore the exemption could apply where a visit of more than 183 days straddles two income years provided the visit does not exceed 183 days in either year.

When applying the "consecutive period of twelve months" criterion it should be remembered that each day means the commencement of a period of 12 months from that particular day. Thus, although a visit may straddle two income years the exemption will not apply if the visit exceeds 183 days over a period of 12 months. For example, a Chinese resident who visits New Zealand on 1 November and departs on the following 30 June will not be exempt as he will have been present in New Zealand for more than 183 days in a consecutive period of 12 months.

In this example, if the criterion was an "income year" instead of "consecutive period of twelve months" the visitor would be exempt as at no stage would he be present in New Zealand for more than 183 days in an income year.

When a visitor from China undertakes employment in New Zealand, New Zealand PAYE tax will be required to be deducted from the remuneration paid but will be refunded at the time of departure provided the requirements of the Article are fully met. In this respect a certificate must be obtained, by the person seeking exemption, from the Chinese authorities which certifies that that person is resident in China for the purposes of Chinese tax.

3. Paragraph 3 provides that remuneration derived from employment aboard a ship or aircraft operating in international traffic may be taxed in the State in which the place of Head Office of the shipping or aircraft enterprise is situated. This means that if the enterprise has its head office in China then China has the right to tax the remuneration derived by the employee. The place of head office would normally be the place of residence of the enterprise.

Article 16 - Directors' Fees

This Article allows the State of residence of the company paying the fees or other similar payments to have the right to tax such income. The income may also be taxed in the recipient's country of residence which would therefore have to allow credit for tax paid in the country of source.

Article 17 - Artistes and Athletes

1. Paragraph 1 enables the State in which the entertainer or athlete is performing the services to tax the income derived from these personal activities.

2. Paragraph 2 deals with the situation where income for the performance of an entertainer or athlete is not paid or paid in full to the entertainer or athlete himself but to an enterprise providing the services of the entertainer or athlete. The paragraph permits the State in which the performance is given to impose a tax on the profits diverted from the income of the entertainer or athlete to the enterprise where, for instance, the entertainer or athlete has control over or rights to the income thus diverted or has obtained or will obtain some benefit directly or indirectly from that income. Without this paragraph the State where the services are performed would, in such cases, be unable to tax:

  • because it would not be personal service income to the entertainer, and;
  • in the absence of a permanent establishment the payments could not be taxed as business profits in the hands of the other person.

3. The effect of Paragraph 3 is that the State in which the activities are performed will not tax the income derived if the entertainer or athlete is performing under an arrangement of cultural exchange between the Governments of the Contracting States.

Article 18 - Pensions

1. Paragraph 1 gives the State of residence of the recipient of the pension exclusive right to tax pensions where they are paid in consideration of past employment. However, this rule is subject to Article 19(2) wherein Government pensions paid in respect of services rendered are taxes exclusively in the State of source but if the recipient is a resident and a national of the other State the pensions are taxable on a residence basis. (See definition of "national" in Article 3.) This means that a Chinese Government pension paid to a resident of New Zealand is taxed only in China and exempt in New Zealand unless the recipient is also a national of New Zealand in which case the pension is taxed only in New Zealand and exempt in China.

2. Paragraph 2 provides that social security pensions may be taxed in the State paying the pensions, ie, State of source.

Article 19 - Government Service

This Article deals with remuneration paid to an individual in respect of services rendered to a State or local authority thereof.

1. Paragraph 1 provides for two situations:

  • Remuneration paid by a State in respect of services rendered to it by an individual is taxable solely by that State, ie, the country of origin of the payment.
  • However, such remuneration is taxable solely in the State where the services are performed provided those services are performed:
    • by an individual who is a resident and a national of that State; or
    • by an individual who is a resident of that State and did not become a resident of that State solely for the purpose of performing those services.

For example, if a Chinese Government employee is resident in New Zealand, under our domestic law, he is exempt from New Zealand tax on his government salary if he is resident here "solely for the purpose of rendering the services". However, a locally recruited employee of the Chinese Government working in New Zealand is not exempt here irrespective of his nationality if he is resident in New Zealand for a reason other than working for the Chinese Government.

2. Paragraph 2 deals with Government Pensions (see explanation to Article 18 in this supplement).

3. Paragraphs 1 and 2 do not apply if the services are performed in connection with a business carried on by the State, or a local authority paying the remuneration. In that event under paragraph 3 the ordinary rules apply: Article 15 for salaries and wages, Article 16 for Directors' fees, Article 17 for Artistes and Athletes and Article 18 for Pensions.

Article 20 - Teachers and Researchers

This Article provides that a teacher or researcher of one of the Contracting States who is temporarily present in the other a Contracting State in order to teach at an educational institution will be exempt from tax on his teaching remuneration in the State visited for a period not exceeding two years from the date of his arrival

Article 21 - Students and Trainees

This Article exempts from New Zealand tax maintenance, education or training payments received here from overseas by a student, business apprentice or trainee from China. Note:

  • The student must have been a resident of China immediately before he comes to New Zealand.
  • He must be in New Zealand for the purpose of his education or training.
  • There is no time limit on the period spent in New Zealand.
  • The exemption is restricted to the payments mentioned, ie, for maintenance, study or training.
  • The converse applies to a New Zealand student, business apprentice or trainee going to China.

Article 22 - Other Income

This Article provides a general rule relating to income not dealt with in the other Articles of the Agreement. The income concerned is not only income of a class not expressly dealt with but also income from sources not expressly mentioned. A secondary effect of the Article is to clarify the situation of income derived from a third country by a person who could be "resident in" both China and New Zealand under the general laws of each country. Under the Agreement that person can be a "resident of" only one country. In such a situation the taxing rights are allocated to the country "of" which he is a resident.

1. The effect of paragraphs 1 and 2 are that income derived by a resident of New Zealand is taxed exclusively in New Zealand unless the income is derived from sources in China. If the income is derived from sources in China it may also be taxed there and a credit for the Chinese tax is given in New Zealand, should that income be liable for New Zealand tax. The converse will apply in the case of a resident of China. Cases of conflict between two residences are to be determined by reference to Article 4.

2. Paragraph 3 provides for an exception from the provisions of paragraphs 1 and 2 where the income is effectively connected with the activity of a permanent establishment or fixed base which a resident of a State has in the other State. The effect is that the right to tax is given to the State in which the permanent establishment or fixed base is situated. However, such income must be taxed having regard to the provisions of Article 7 or Article 14.

3. In terms of paragraph 1 of the Protocol income from the business of any form of insurance is not subject to the provisions of this Article. Such income may be taxed in accordance with the domestic law of each country.

Article 23 - Methods of Elimination of Double Taxation

1. This Article contains the normal rules whereby each State gives credit for the other State's tax when assessing its residents on income derived from sources in the other State. It should be noted that the credit provisions in the Article are subject to the domestic law of each country.

2. Paragraph 3 allows New Zealand companies investing or operating in China to gain the benefits of Chinese incentive legislation by allowing a notional credit for tax which would have been paid in China but for the incentive exempting the income in full or in part from Chinese tax in terms of the specific incentive legislation referred to in paragraph 3 of the Article. However, in the case of dividends, interest and royalties the notional credit shall not exceed the limitation provided for in the Articles governing these types of income. (See paragraph 2 of the Protocol).

Article 24 - Non-discrimination

The purpose of this Article is to prevent discrimination on the grounds of nationality.

1. Paragraph 1 establishes the principle that for taxation purposes discrimination on the grounds of nationality is forbidden. The paragraph prevents a State from imposing any more burdensome taxation or connected requirement on nationals of the other State than it imposes on its own nationals in the same circumstances.

2. Paragraph 2 requires non-residents trading through a permanent establishment to be taxed no less favourably than a resident who carries on the same activities.

3. Paragraph 3 is designed to end a particular form of discrimination resulting from the fact that in certain countries the deduction of interest, royalties and other disbursements, allowed without restriction when the recipient is resident, is restricted or even prohibited when he is a non-resident. New Zealand does not discriminate between residents and non-residents in this area.

4. Paragraph 4 prevents discrimination against companies the capital of which is wholly or partly owned by residents of the other State, eg, a New Zealand subsidiary of a Chinese company.

5. Paragraph 5 ensures that each country may distinguish between residents and non-residents. The paragraph makes it clear that the Article does not prevent different tax treatment solely on the basis of residence.

Article 25 - Mutual Agreement Procedure

Article 26 - Exchange of Information

These are standard Articles and require no further comment.

Article 27 - Diplomatic Agents and Consular Officers

The aim of this Article is to ensure that diplomatic agents or consular officers shall, under the Agreement, receive no less favourable treatment than that to which they are entitled under international law or under special agreements.

Article 28 - Entry into Force

The Agreement came into force on 17 December 1986 with effect in New Zealand for any income year beginning on or after 1 April 1987.

In China it takes effect in respect of income derived during the taxable year beginning on or after 1 January 1987.

Article 29 - Termination

This Article sets out the procedure if either State wishes to terminate the Agreement. Unless notice of termination is given in accordance with the Article the Agreement continues indefinitely.