April-May China Bulletin

State Administration for Taxation (SAT) issued Announcement 19, [2013] No. 19, with effect from June 1, 2013, providing guidance on seconding expatriates to China.  Many U.S. companies send expatriate employees to work in China on a temporary basis.  If considered employees of the U.S. company while rendering services in China for more than six months in a year, a service permanent establishment (PE) of the U.S. company will normally be created retroactively in China under relevant double-taxation agreements.  A U.S. company with a PE must file Enterprise Income Tax (EIT) returns and pay EIT on actual or deemed income in China.

To minimize the risk of creating a PE,  many U.S. companies second expatriate employees to work with a subsidiary or other local employer in China.  If properly structured, the employee’s services do not create a PE in China, but the employee is still considered an expat for many Chinese employment [see Jan-Feb 2013 China Bulletin] and foreign exchange purposes and is typically able to continue participating fully in U.S. employment-related benefit plans.

In 2009, the PRC tax authorities started finding that many secondment arrangements did actually create a PE.  In 2010, the SAT issued a guidance under China’s bilateral tax treaties that directed local tax authorities to consider several criteria in determining the existence of a PE, including whether the foreign company continued to supervise and control the employee’s work, bear his/her costs and receive benefit from the secondment arrangement, but the guidance was not consistently followed at the local level.

Announcement 19 provides clearer guidance and is grounded in Chinese domestic tax law (rather than double-taxation treaties) and should be followed more closely at the local level.  It sets out a fundamental criterion to be considered:   Whether the foreign company bears all or part of the responsibility and risk related to the expatriate employee’s work and whether it normally reviews and appraises the employees job performance.

If the fundamental criterion is met, then the following reference factors will be considered:

  • Whether the Chinese host company pays the foreign company management fees or makes payments in the nature of service fees;
  • Whether the payments from the Chinese host company to the foreign company exceed the amount of the employee’s wages or salary;
  • Whether the foreign company passes on all of the payments received from the Chinese host company, or keeps part of such payments;
  • Whether individual income tax is paid in China on the full amount of wages and salary born by the foreign company; and
  • Whether the foreign company decides the number of employees sent to the Chinese host company, their remuneration, and work locations.

If the fundamental criterion and at least one reference factor is met, the employee will be considered to be an employee of the foreign company rendering services in China.

U.S. companies should plan and structure their secondments to China carefully to avoid Chinese tax costs and administrative burdens.

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