Permanent Establishment and Taxation guidance in China

Hot
A
city 2

 

This article has been redacted for tianjinexpats by AsiaLink Tianjin, company registration, taxes, accounting, visa services, for more info please contact us This email address is being protected from spambots. You need JavaScript enabled to view it.

 

 

Introduction :


In the past few years there has been a rapid growth in industrial, material and technological establishments in China. In turn, the Tax Liabilities due to the business transactions in China are moving into a delicate situation with a matter of national concern. The foreign bodies who pursue to invest in China are unaware of the fact that their business activities may constitute a Permanent Establishment (P.E) and thus emphasis them to pay corporate taxes.


There are few countries who do not have an agreement with China and hence imply the Businesses to pay taxes in both the countries which could substantially increase the tax burden on the business.


With the Chinese government having loosen up rules on taxation in the past few years, where an overseas parent company may allow their actions constitute provision of services to the China subsidiary and hence help them earn a Service PE i.e Service Permanent Establishment in China. The following article will help in understanding the Chinese taxation, the circumstances that trigger the the creation of a Permanent Establishment in China, the tax implications for a non resident enterprise where its activities constitute a Service Permanent establishment in China.


This is focused on a thought that the article would help foreign bodies to invest wisely when they plan to invest in China. Topics covered in this article are,


- Attaining and triggering a Permanent establishment status

- Tax advantages and implications of a Service Permanent establishment

- Countries with agreement in China to avoid double taxation



Attaining and triggering a Permanent establishment status :


While starting a business everyone should be calculative on their taxes which will save them loads in future, similarly when  foreigners plan to do business in China, tax should be their major concern. Since business or individual income derived from China is taxable both in China and in their respective home country.


A non-resident enterprise i.e an enterprise which doesn't have a Chinese origin whose establishment and effective management is outside China, is subjected to CIT law (China’s corporate Income Tax law). The CIT implies 10% on their China sourced income, which includes:


  • Income from property transfers

  • Income from equity Investments such as Dividends and Bonuses

  • Income derived from Interests, Rentals and Royalties

  • Income derived from donations and any other income.


A non-resident enterprise i.e an enterprise which doesn't have a Chinese origin whose establishment and effective management is outside China, is taxable at 25% CIT for China-Sourced income and non-China sourced income which has a connection to China’s establishment or site. However, if the non-resident Enterprise is a Tax resident of a jurisdiction which has the benefits of double tax agreement (DTA)  with China, the non-resident can claim an exemption from CIT. DTA’s help in minimizing the tax imposed by two or more countries, i.e allowing the tax paid in one country to be offset against tax payable in another country. DTA’s also help in exceptions or tax reduction for few specific income types like, interests, dividends and royalties. DTA’s also provide clarity and certainty by fixing the taxation rights of each jurisdiction on several types of income which arise due to cross-border activities.


China’s tax treaties with various countries, Article 7 specifies that, “The profits of enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to that permanent establishment”


This means that,  the resident of a country which has a DTA with China and runs a business in China through a Permanent Establishment (PE) will be implied to taxes in China. Based on the different DTA’s , non-resident companies can be deemed to have a PE if  they fall under the following categories.


  • Fixed place PE - The foreign company has an establishment or place for business in China.

  • Construction PE - The foreign company has a construction, building site, installation or     assembly project or supervisory activities that would last for a period of time.

  • Agent PE - The foreign body appoints an agent in China to conclude contracts or accept orders in China.

  • Service PE - The foreign company has employees working in China for a period of time.


The employees who are contracted or subcontracted, who have worked for a period of 6 months or 183 days in a 12 month- period fall in this category. The provision in the China- US tax treaty states that, “The term ‘Permanent Establishment’ also includes [...] the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such people, but only where such activities continue(for the same or a connected project) within the country for a period or periods aggregating more than six months within any twelve month period”.


However, there have been several cases where legislative interpretations have differed throughout China due to the different practices of Chinese government officials, like


  • The registration of a PE being hampered by local tax officers

  • No taxes being charged when the customer was a State-owned enterprise

  • Tax officers tampering records that a PE had been constituted on additional “soft” factors.

 


Tax advantages and implications of a Service Permanent establishment :


As discussed earlier, a non-resident enterprise establishment or enterprise constitutes a Permanent Establishment in China and is subjected to 25% of CIT (Corporate Income Tax) on all of its China - sourced and non China- sourced income until it has a connection to the Permanent Establishment (PE).


The PE taxation’s general principles are laid out in Article 7 of DTA’s (Double tax agreement) which makes it very clear that,


  • Only profits of a non-resident enterprise attributable to its P.E in China are taxable in China

  • When determining the profits of a PE, transactions between a non-resident enterprise and the PE are treated as transactions between independent parties

  • Expenses incurred for the business of a PE, including general and administrative allocated from the non-resident enterprise, are deductible and

  • Amounts paid to the head office or its other offices by way of royalties or interests on money lent to the PE are not deductible.


Corporate Income tax or CIT


Non resident enterprises are supposed to maintain all their accounts properly so that the tax can be applied to the actual profitable amount alone, according to the “Administrative measure for the assessments and collection of CIT on Non-resident enterprises”. The calculation of CIT on an actual profit is as follows,


CIT = Actual Taxable income * CIT rate


when there are issues with the enterprise’s accounts the actual taxable income is determined by the following methods,


  • Actual revenue method

    • Taxable income = Total revenue * Deemed profit rate

  • Cost plus method

    • Taxable income = Costs/ (1-Deemed profit rate) * Deemed profit rate

  • Expenditure plus method

    • Taxable income = Expenditures/ (1-Deemed profit rate-Business tax rate)* deemed profit rate


The deemed profit rates varies based on the type of business of the non-resident enterprise, specified in circular 19. The deemed profit rate of Construction projects, design and consulting services is 15-30%. Whereas the deemed profit of Management services is 30-50% and the deemed profit of other services or operating activities other than services will not be less than 15%. Also, if the tax authorities have enough evidence to believe that the profits earned by the non-resident enterprise is higher than the specified rates, they have the authority to modify the specified rates. If a non-resident enterprise handles several businesses the taxes should be calculated separately or the business with the highest profit should be considered.


Non - resident enterprises which offers services have to pay taxes for the income derived from the services offered in China. if the service is offered inside and outside China the enterprise if entitled to allocate profit based on workload and cost. If the tax authorities are not satisfied with the evidence of proof that the services offered outside China is higher than the services offered in China, then they have the authority to convert the entire relevant income to be considered for tax calculation.


Non - resident enterprises selling machinery equipments, products to China and offering simultaneous services such as installation, technical training, assembling, guidance and supervision should add both the cost of the machinery and supporting services in the equipment sales contracts. If the authorities do not find the pricing of services to be relevant or reasonable, the tax authorities could refer to the prices of identical or similar services. If there is no reference available for the similar kind of service then service revenues would be deemed to not less than 10% of the total amount in the sales contract. Hence, non - resident enterprises are always advised to maintain separate contracts for equipment and services. Even if the equipment is sold in a place outside China and has waved the Chinese taxes for the equipment sales, the revenue generated from services offered in China are subjected to Chinese tax. Also an important point to be noted is, Royalty service fees that has substantial connections with a PE will be taxed as the profit of PE and also applying 25% CIT than the reduced or exempted rates under the royalty provisions.


Indirect Tax


There is a 5% of Business tax (BT) or Value added taxes (VAT) and surcharges when a non - resident enterprise offers services to a Chinese company. The surcharges include the Urban construction and maintenance tax (UCMT), Education surcharges (ES) and local education surcharge (LES) which are calculated to 12% on the total indirect tax liability. In the service sectors, VAT (Value added taxes) and BT (Business taxes) are proposed to be combined in a pilot being implemented in provinces of Shanghai in 2012 and is believed to be implemented in all regions nationwide by August 2013. The service sectors where a 6% VAT (Value added taxes) imposed in lieu of BT (Business tax) are, R&D and technology services, Information technology services, Cultural and creative services, Logistics auxiliary services, authentication and consulting services.


It is advisable to clearly mention in the contract of service that the service is VAT- exclusive, so that the VAT is not added to the non-resident company for offering services to the Chinese company. If the Chinese company is a general VAT taxpayer, it will be able to deduct the VAT paid against their output VAT earned in the business's operations.  Hence its always advisable to mention clearly in the Service contract that the service is VAT- Exclusive.


Individual Income Tax


As soon as a PE (Permanent establishment) is constituted, The expatriates who work for the PE are subjected to IIT (Individual Income Tax). The IIT (Individual income tax) is applied on their China - sourced income and is calculated from the first day they arrived in China for the specific project. Their work will be taxed pro-rata (based on the number of days they stay in China in a month) and the 183-days exemption rule under the DTA (Double tax agreement) will not be applied. If it is not sure that the project constitutes a PE the filing and payment of taxes can be postponed for a month until the  project constitutes a PA, else the tax has to be filed and paid monthly.


The IIT (Individual income tax) calculation for Expatriates under PA are as follows,


Full month = ((Salary-4,800)*Tax rate - QD) * Tax rate - QD)


Under a month = ((Salary-4,800)*Tax rate - QD) * (Days in China/Days in current month)


 

 

Countries with agreement in China to avoid double taxation :


Albania

Egypt

Kuwait

Pakistan

Tajikistan

Algeria

Estonia

Kyrgyzstan

Papua New Guinea

Thailand

Armenia

Ethiopia**

Laos

Philippines

Trinidad & Tobago

Australia

Finland

Latvia

Poland

Tunisia

Austria

France

Lithuania

Portugal

Turkey

Azerbaijan

Georgia

Luxembourg

Qatar

Turkmenistan

Bahrain

Germany

Macao

Romania

Ukraine

Bangladesh

Greece

Macedonia

Russia

United Arab Emirates

Barbados

Hong Kong

Malaysia

Saudi Arabia

United Kingdom*

Belarus

Hungary

Malta

Serbia & Montenegro

United States

Belgium*

Iceland

Mauritius

Seychelles

Uzbekistan

Bosnia - Herzegovina

India

Mexico

Singapore

Venezuela

Brazil

Indonesia

Moldova

Slovakia

Vietnam

Brunei

Iran

Mongolia

Slovenia

Zambia

Bulgaria

Ireland

Morocco

South Africa


Canada

Israel

Nepal

Spain


Croatia

Italy

Netherlands

Sri Lanka


Cuba

Jamaica

New Zealand

Sudan


Cyprus

Japan

Nigeria

Sweden


Czech Republic

Kazakhstan

Norway

Switzerland


Denmark*

Korea (R.O.K)

Oman

Syria


* An additional protocol has been signed but is not yet in effect.

** Signed but not in effect at time of writing

 

This article has been redacted for tianjinexpats by AsiaLink Tianjin, company registration, taxes, accounting, visa services, for more info please contact us This email address is being protected from spambots. You need JavaScript enabled to view it.

 

AsiaLink is a Tianjinexpats Co, Ltd service

 

 

User comments

There are no user comments for this listing.
Already have an account?
Anti Spam Check
Don't want to answer that question every time?
Register an account
It's FREE and give you access to advanced features
Comments
You will be able to upload media right after you submit your comment.

Latest articles

Closed streets in TEDA for Marathon
Category: What's Up
Drivers in TEDA please remember that streets will be close on Saturday 4th for annual TEDA marathon More info on the marathon click here Closed roads map
hao chi longtaitou
Category: Lifestyle
This year, the Longtaitou Festival falls on 7th March, 2019. Let's learn about the origins, traditions, customs, and the legend of the blue dragon! The Longtaitou Festival ...
Visions
Category: Lifestyle
Panoramic shots of Tianjin and the surrounding areas with history and commentary Tianjin | A light snow of 2019. The morning sun illuminating the sky. ...
Permanent Establishment and Taxation guidance in China
  This article has been redacted for tianjinexpats by AsiaLink Tianjin, company registration, taxes, accounting, visa services, for more info please contact us asialink@outlook.com     Introduction : In the past few years there has been a rapid growth in industrial, material and technological establishments in China. In turn, the Tax Liabilities due to the business transactions in China are moving into a delicate situation with a matter of national concern. The foreign bodies who pursue...
How Do I Find An Ayi (Maid/Household Help)
      How Do I Find An Ayi (Maid/Household Help)   If you live on your own, there are tons of advantages to hiring someone to help you clean and cook. What I've done is hired someone to work two hours a day around lunch hour to help me clean (sweep & squeegee-or-whatever-you-call-that-thing the floor, pick up random clutter, handle laundry, heat a thermos of water, dishes) and to make the day's food for us. ...
How Do I Connect To The Internet?
  How Do I Connect To The Internet?   Depending on which part of Tianjin or the complex/building you live in, Tianjin offers you varieties of internet service providers. Internet Connection installation is usually handled by your landlord. Suggest you talk to your landlord and see what options you have there for your building/area. Chinese people don’t care too much for internet speed so whenever you move in a house/apartment, makes sure to tell your landlord to apply for the fastest connection package available. ...
How Do I Pay For My Electricity?
  How does the electricity generally work?   Most electricity in Tianjin is purchased in advance by the unit, to be consumed only after purchase. However, some people must pay a bill collector who personally comes to their door every month to collect. When you first move into your apartment, your landlord should give you a cardboard card with the apartment’s electricity purchase record and a two-inch long plastic charger piece or the electric purchasing card. After removing the plastic cover, the head of this...
How Do I Rent An Apartment
    Tianjin Housing Guide   When it comes to renting an apartment, best you have some local friends with you as you will be ripped off regardless of what once the landlord/agent knows you are a laowai/foreigner. Here in Tianjin, real agents get their commission directly from the landlord if you are renting the apartment for a year which is usually one-month worth of value of the rent itself. For this, don’t ever give in the agents or the landlords. Commission is...
How Do I Seek Medical Care In Tianjin?
      Hospitals in general:   There are little clinics every few blocks in Tianjin, and if you've got something minor, go there. I'd recommend getting a medical translation dictionary. The doctors are usually competent IF they know what you're talking about, and they'll listen, again, if you know what you're saying to them, but they can be super pushy if they don't. Also, they've got a pretty wide array of basic Western antibiotics and such, but you've got to know the translation....
How Do I Use The Post Office?
      Insight on China Post   In experience, using the postal service is one of the more frustrating experiences one can have in China. A lot of times it seems like their jobs are more to hinder people from using the postal service rather than to provide a service; although some times are much better than others. If you have a complicated task, and your Chinese is not up for it, it might be necessary to find someone to help you. ...
How To Watch Tv Shows and Movies in China
A quick overview of different way for you to watch your preferred movies and TV shows while in China 1 Buy dvd in the Streets Cheap way, be sure to ask the vendor to watch it before buying, to be sure that the subtitles are actually to good one, and that you don't get a movie in Cantonese with Japanese and Korean subtitles only. You won't be able to bring these DVDs back home, EMS won't allow you to send then out of the country, and...
How to Bring My Pet in China
1 Two ways to proceed : DIY , use an agent DIY Go to your local consulate and ask for necessary documents. They are the most up to date source of information. It is not so hard Contact an agent : look on google “bring my pet in China” . This is a very expensive solution but they will take care of everything. Pay a lot just for something you can do by yourself   DIY 2 Vet certificate that proof your pet received...
How to Buy Electronic Stuffs Online for Your Apartment and Pay While They Arrived at Your Place (by using www.jd.com)?
Are you still looking for electronic stuffs to fill your apartment? However, of course it will take more time to go shop around the outside will the limitation of products to be compared. I have asked some Chinese friends about buying electronic stuffs to fill my living place. Most of them suggest me to do the online shopping in JingDong. Some of the advantages are: 1. The price is quite cheaper rather than doing the offline shopping. ...
How to register on Alipay, to buy on taobao (without chinese id) Updated 30/06/16
  Why you should have an alipay account? Shop on most of Chinese website, including Taobao and Tmall Transfer money to your friends Pay credit card bills Pay phone bills Go Dutch Get a taxi       Add us on Wechat : tianjinexpats or by scanning the QrCode   ...
Exchange your Yuan and send Money out of China(Union Pay, Wire, Western Union, Alipay, Paypal) updated 09/08/2017
Whether it is for your student loans and credit card debt or you're just looking to buy some gift going back home for Christmas, every expat will have a day the need to transfer money abroad. It seems like a hassle but www.tianjinexpats.com team hope this memo will help you a lot. 28/07/2017 Update: New S.A.F.E. regulations about international UnionPay payment: Starting the 22 of September Chinese banks may report to taxes bureau any transaction over 1000元, (including cash withdrawal abroad and shop payment abroad). If you regularly use your UnionPay card abroad for payment and withdrawal of more than 1000元, you may...
How and why should you get an verified Alipay account (without Chinese ID card) Updated 30/06/2016
How and why should you get a verified Alipay account? 30/06/2016 Update. That article is to get a passport verified account, later alipay may ask you to get a second bank card verified account. You can check our second article for that purpose by Clicking here Alipay and Wechat account after 1st July 2016. What should I know and do? or scan qrcode   Let's start with the why? To override...
Exhibition Jacques Bartz in Le Loft
Category: Lifestyle
关于我 作为波兰裔的法国人 我一年半前到天津 一直对周围的环境充满好奇 随着时间推移 我的洞察力越来越敏锐 所以很自然的 我开始从事摄影 作为完美的现代浪漫主义艺术 摄影对我而言首先是展现世界的视窗 也是我对现实的模糊印象 通过这18张照片 这就是今天我希望向大家展示的 希望大家好好观看、欣赏、感受 « 照片所呈现的是不可见的 它不仅是我们所看见的样子 » Roland BARTHES.  About me, French of Polish origin, I settled in Tianjin a year and a half ago. Since the early days, I have been curious about the surrounding environment. I have become very observant over the years. Therefore, quite naturally, I turned to photography. Modern romantic art par excellence, photography is to me, first of all, a point of view over the world,...
Alipay and Wechat account after 1st July 2016. What should I know and do?
New Chinese regulations have been released and people have been ask to prove their identity on the on-line payment platform : Wechat and AliPay. New regulations are not here against foreigners, they apply to everybody. But verification is more complicated for foreigners, cause of the way banks input our name into the system.   Basically new regulation split user in 3 categories depending on the amount you spend, transfer monthly, or annualy on your account.   Wechat Category 1 : Wechat need bank linking //everybody...
How to share your events with the expats community
Category: What's Up
By posting your event on the website, you will gain into visibility. It will be reposted on WeChat official account, WeChat moments, Facebook and in the mailing list   It is important that you use well the event tools, to setup correctly and nicely your event.   First a few rules: (I know nobody like rules, but ….) In the event calendar shall appear only events (looking for a job, offering job, buy/sell, reviews of places and places) shall be put in appropriated...

Copyright © 2017. AsiaLink.com-Goexpats.com-津ICP备18008001号-1 .