Permanent Establishment and Taxation guidance in China

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 :









Papua New Guinea






Trinidad & Tobago

























United Arab Emirates


Hong Kong


Saudi Arabia

United Kingdom*




Serbia & Montenegro

United States






Bosnia - Herzegovina


















South Africa








Sri Lanka



New Zealand






Czech Republic





Korea (R.O.K)



* 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.


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