The State Administration of Taxation (SAT) on 9 February 2018 issued bulletin No. 11 regarding several issues relating to the implementation of China’s tax treaties. A key issue addressed relates to how to determine when a service permanent establishment exists. The permanent establishment risk is often the main complication/issue when overseas companies second expats to China for work.
Foreign companies that second employees to work in China would welcome bulletin No. 11’s replacement of the six-month threshold with 183 days for the determination of a service permanent establishment.
The six-month threshold is typically seen under some of China’s tax treaties signed prior to 2008, such as the China-US tax treaty. China used to have a “one day equals one month” rule under notice No. 403, i.e., each calendar month in which the non-resident enterprise has personnel present in China, even for just one day, may count as one month for the determination of the six-month threshold for a permanent establishment. Although the “one day equals one month” rule was repealed in 2011, some Chinese tax bureaus still follow this approach in practice, because the SAT had not issued any new rule to replace it.
With the clarification provided under bulletin No. 11, a foreign enterprise from jurisdictions that have a six-month threshold in their tax treaties with China will now have more certainty on mitigating the service permanent establishment risk in a situation where it assigns employees to China for a limited time, but over the course of multiple months (for example, 10 days each month in 10 consecutive months).
This may reduce the Chinese tax exposure for both the foreign enterprise and its employees.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at danian.zhang@bakermckenzie.com
