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Rwanda ratifies its DTT with China, creating fail-safe tax structuring opportunities for EPC companies

On 4 March 2022, Rwanda gazetted presidential order nº 006/01 of 24/02/2022, ratifying the double tax treaty between the Republic of Rwanda and the People’s Republic of China and its protocol signed in Kigali on 7 December 2021 (the “DTT with China”).

While the DTT with China is, in many respects, similar to the other DTTs that Rwanda has recently entered into with various economies, its provisions dealing with taxation of business profits of enterprises of one contracting state having permanent establishments (“PEs") in the other contracting state are peculiar.

To begin with, the DTT with China, in its article 7, adopts the functionally separate entity approach. This is an OECD authorised approach whereby profits attributable to the PE and therefore taxable in the source state are those it would be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities and dealing wholly independently with the enterprise of which it is a permanent establishment.

Unlike other DTTs signed and ratified by Rwanda, the DTT with China does not include a force of attraction provision permitting the source state to tax business profits derived in such state by non-resident enterprises, but that could not otherwise be attributed to their respective PEs applying the functionally separate entity approach.

For the case of construction or equipment installation contracts involving the onshore provision of construction and/or installation services by the PE in the source state (on one hand) and supply of equipment and/or materials by the head office (on the other hand), the DTT with China specifically precludes the source state from taxing profits derived from the supply of equipment and/or materials by the head office unless the PE has involvement in the supply of such equipment and/or materials.

The way the DTT with China deals with the attribution of profits to PEs, particularly project PEs, may be assuring for Rwandan or Chinese EPC companies implementing construction projects in Rwanda or China as the case may be, especially in these times where tax administrations are seen to be trying to drag profits derived from offshore parts of the EPC contracts into the profits taxable at the PE level.

EPC companies can now choose between setting up local subsidiaries or registering branches, and split their EPC contracts into onshore and offshore parts with limited risk (if any) of having the profits derived from the offshore part taxed by the source state.

Reviewed by Désiré Kamanzi, head of ENSafrica | Rwanda.

Dieudonné Nzafashwanayo

ENSafrica Rwanda | Senior Associate