A landmark double taxation agreement between China and Taiwan was signed on August 25.

    According to China's State Administration of Taxes, the agreement is intended to "prevent and eliminate the double taxation of cross-strait business and trade exchanges, reduce the tax burden of companies and individuals, and promote mutual cross-strait direct investment."

    In addition, the agreement will facilitate cooperation between the two sides on tax matters, including the resolution of disputes. It also contains provisions for the exchange of tax information between the two sides.

    Although the final text of the DTA is not available, it is reported that a Taiwanese company without a permanent establishment in China, and whose place of effective management is in Taiwan, will be subject to corporate income tax only in Taiwan on the profits it makes in China. Such a company will therefore pay the Taiwanese corporate tax rate of 17 percent, rather than the 25 percent rate that is currently imposed in China.

    As that provision will also apply to businesses who invest in China through Taiwan, it is hoped that the finalization of the DTA will incentivize foreign companies to establish operations in Taiwan to access the Chinese market.

    China is expected to see an initial fall in its tax revenue due to the clarification of taxing rights. Taiwan's annual tax collections are expected to grow by between TWD8.1bn (USD251.5m) and TWD13.3bn, while Taiwanese companies may see a reduction in their annual taxes of some TWD3.9bn.

    The DTA will be effective after both parties have completed their necessary domestic ratification procedures.