Service Permanent Establishment Day Counting Rules under Chinese Double Tax Agreements
Exceeding 183 service presence days within twelve months under Chinese tax treaties creates corporate tax liability assessed on deemed profit margins.
State Taxation Administration Announcement 2013 No 19
Meaning
Regulatory circulars on secondment tax risks provide the logic for determining whether foreign employees assigned to Chinese subsidiaries create a permanent establishment for the parent company. Since the release of state taxation administration announcement 2013 no 19, tax authorities have focused on whether the foreign entity retains the risks and rewards of the employees’ work. If the foreign parent is found to be providing services through its staff rather than simply assigning them to the local company, a taxable presence is established.
The regulation outlines several factors to help distinguish a genuine secondment from a service provision.
Responsibility Allocation
Responsibility for the professional actions of the personnel determines which entity is the true employer for tax purposes. Under state taxation administration announcement 2013 no 19, the parent company is often viewed as having a permanent establishment if it bears the liability for the work performed by the seconded staff. This includes situations where the parent company guarantees the quality of the work to the Chinese client.
The bureau looks at who conducts the performance reviews and who has the power to terminate the assignment. If the foreign parent maintains control over these aspects, it is deemed to be using the employees to carry out its own business in China. This triggers corporate income tax and value added tax on the service fees.
Local Compliance
Local entities that receive seconded staff must report the details of these arrangements to their governing tax office. According to state taxation administration announcement 2013 no 19, the Chinese subsidiary must submit the secondment agreement and any related cost sharing contracts. This reporting must happen within thirty days of the agreement being signed or the personnel arriving.
Failure to report these details can lead to a formal audit of the entire intercompany relationship.
Inspections Direction
Inspections usually focus on the reimbursement of salaries and the nature of any administrative fees paid to the foreign parent. State taxation administration announcement 2013 no 19 clarifies that if the local company pays more than the actual salary and social costs, the arrangement might be reclassified as a service. This reclassification leads to a deemed profit assessment on the total amount paid.
Tax bureaus check whether the foreign parent is actually making a profit on the personnel costs.