Evaluating Economic Employer Doctrine Principles under Chinese Secondment Rules
China reclassifies foreign secondment wage recharges as taxable service fees whenever the local entity operates as the true economic employer under Bulletin 19.
Double Taxation Treaty Article 15
Meaning
Provisions governing the taxation of income from employment establish specific conditions under which a foreign resident pays taxes in the country where work is performed. Most international tax agreements include double taxation treaty article 15 to clarify the jurisdictional rights over the salaries of expatriate workers. The State Taxation Administration uses this article to determine when a foreign national becomes liable for individual income tax in China.
It generally provides that employment income is taxable in the country of residence unless the employment is actually exercised in the other country. However, even when work is performed in China, the income may be exempt if the individual stays for less than 183 days and other conditions are met. The boundary of the article applies to private sector employment and excludes government service, pensions, or director fees which are covered by other articles.
It is designed to prevent the same income from being taxed by both the home country and the host country. These rules apply to short term assignments, business trips, and regional management roles.
Residency Threshold
The number of days an individual spends in a country during a calendar year or a rolling twelve month period determines the primary tax jurisdiction. Under double taxation treaty article 15, the 183 day rule is the most common threshold for determining tax liability. If a foreign employee stays in China for fewer than 183 days, their salary is usually not taxable in China, provided it is paid by a foreign employer.
The calculation of days includes any part of a day spent in the country, including weekends and holidays. If the threshold is exceeded, the individual becomes taxable on the income earned during the entire period of stay. This rule provides a safe harbor for short term consultants and technical experts who visit China for brief projects.
Tax authorities require passport stamps and travel logs to verify the accuracy of the day count.
Employer Location
The source of the salary payment and the location of the entity that bears the cost are critical factors in the tax assessment. Even if an employee stays for less than 183 days, double taxation treaty article 15 mandates taxation if the salary is paid by a local employer. This includes a Chinese subsidiary of a multinational corporation or a local branch of a foreign bank.
The rule also applies if the salary is paid by a foreign company but the cost is charged back to a permanent establishment in China. This prevents companies from avoiding local taxes by paying employees through offshore entities while the local operation receives the benefit of the work. The tax bureau examines the intragroup service agreements to see if the payroll costs are being reimbursed by the Chinese entity.
If the local company effectively bears the burden of the salary, the exemption for the employee is lost.
Tax Liability
Determining the total amount of tax due requires a clear distinction between income earned for work in China and income earned elsewhere. When double taxation treaty article 15 applies, the individual must file a tax return in China for the portion of their salary related to their Chinese work days. This calculation often involves a time apportionment method where the total salary is multiplied by the ratio of Chinese work days to total work days.
Bonuses and allowances are also included in the taxable base if they are related to the Chinese assignment. The treaty provides a mechanism for claiming a tax credit in the home country for the taxes paid in China, which avoids the problem of paying twice on the same earnings. Employees must keep detailed records of their work locations and pay stubs to support their tax filings.
Failure to comply with these rules can lead to individual penalties and can also impact the company’s compliance rating. The final tax position is a result of the interaction between the treaty and the domestic individual income tax law.