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China: Clarifications issued on when secondment creates Chinese taxable presence for foreign enterprises

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Khoonming Ho


Lewis Lu

On April 19 2013, the State Administration of Taxation (SAT) of the People's Republic of China issued Announcement 19 to provide guidance on when cross-border secondment of expatriates into China may create a PRC permanent establishment (PE) in the treaty context. The main focus of Announcement 19 is to define under what circumstances a secondee dispatched from a foreign enterprise (home entity) to work at an enterprise in China (host entity) on assignment is viewed as being employed by the home entity rather than the host entity and therefore creates a taxable presence in China for the home entity. According to Announcement 19, a "fundamental criterion" for a secondee to be regarded as an employee of the home entity rendering services in China and thus having a Chinese PE, is whether the home entity bears all or part of the responsibilities and risks in relation to the work products of the secondee, and whether it is the home entity that normally reviews and appraises the job performance of the secondee.

Beyond the fundamental criterion, Announcement 19 prescribes the following factors (reference factors) in deciding whether a secondee is in substance employed by the home entity:

  • The host entity in China pays the home entity management fees or makes payments in the nature of service fees;

  • The payment to the home entity from the host entity exceeds the secondee's wage, salary, social security contribution, and other expenses borne by the home entity;

  • The home entity does not pass on all the related payments made by the host entity to the secondee; instead, the home entity retains certain amount of such payments;

  • PRC individual income tax is not paid on the full amount of the secondee's wage and salary borne by the home entity; and

  • The home entity decides the number, the qualification, the remuneration and the working locations of secondees in China.

If the fundamental criterion is met and at least one of the reference factors is satisfied, the secondee will generally be considered an employee of the home entity rendering services in China. In this case, the home entity has a significantly greater risk of service PE in China.

Announcement 19 represents an important measure by the Chinese tax authorities to tighten up the tax enforcement against non-residents on their taxable presence in China and meanwhile increase tax certainty for taxpayers. Multinational companies with personnel stationed in China should conduct a thorough review of internal documentation related to their secondment arrangements, including contracts between the home entity, host entity and the secondees, and internal management protocols for the use of the secondees, and rectify weaknesses when necessary to support their position of no taxable presence in China.

VAT excluded from calculation of Chinese income withholding tax on cross-border payment of royalties and rents

In February 2013, the State Administration of Taxation (SAT) of the PRC issued a clarification that, in calculating the corporate income tax that must be withheld from payments of China-sourced royalties and rents to non-residents (CIT withholding tax (WHT)), any VAT arising on the payments may be excluded from the taxable base for calculating CIT WHT (10% subject to treaty relief).

When Chinese companies pay royalties and rents to non-residents, the payments are generally subject to business tax (BT) in addition to CIT WHT. For Chinese companies located in regions that have implemented the VAT reform pilot program, VAT instead of BT applies. The clarification, which is contained within the SAT Announcement [2013] No.9 only impacts on payments of royalties and certain rents that fall within the scope of the VAT reform pilot program and therefore are subject to VAT rather than BT.

The necessity for this clarification arose from the fact that the relevant regulations for calculating CIT WHT defined the taxable base as "total consideration and extra charges", without specifying whether the term "extra charges" included indirect taxes such as BT and VAT. While Caishui [2008] No. 30 specifically provides that BT may not be excluded from the taxable base to compute CIT WHT, the situation was unclear for VAT.

Announcement 9 has now definitively clarified that VAT may be excluded from the computation of CIT WHT, ending the uncertainty. The clarification does result in a disadvantage to non-residents receiving royalties or rents that are subject to BT rather than VAT because the Chinese payors are outside regions that have implemented the VAT reform pilot program. This disadvantage should cease to exist after August 1 2013, when the VAT reform will be rolled out to the entire country and all royalties and rents from China will generally be subject to VAT instead of BT.

Khoonming Ho (khoonming.ho@kpmg.com)

KPMG, China and Hong Kong SAR

Tel: +86 (10) 8508 7082

Lewis Lu (lewis.lu@kpmg.com)

KPMG, Central China

Tel: +86 (21) 2212 3421

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