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Tax residence and fiscal domicile

i Corporate residence

A company is a resident enterprise in China if it has been incorporated under Chinese law or if it has been incorporated outside China but has a place of effective management in China. A place of effective management refers to a place where overall management and control over business operations, staffing, finance and assets are exercised in substance. A tax notice issued in 2009 provides that a Chinese-controlled foreign company should be regarded as a Chinese-resident enterprise if all of the following factors exist:

  1. the enterprise's senior management personnel and the senior management bodies carry out the day-to-day management of the enterprise mainly in China;
  2. finance-related decisions and HR-related decisions are decided or approved by bodies or personnel in China;
  3. the major assets, accounting books, meeting records for shareholders' meetings and directors' meetings, etc., are located or kept in China; and
  4. at least half of the directors with voting powers or the senior management personnel are habitually resident in China.
ii Branch or permanent establishment

A non-resident enterprise with a place or establishment in China is subject to EIT on its China-sourced income and on its non-China-sourced income that is effectively connected to the PE. A 'place or establishment' is a domestic concept similar to that of a PE under DTAs.

The distinctive feature of the domestic concept of place or establishment is that the following are deemed taxable places or establishments:

  1. places of management or business organisation;
  2. places of business;
  3. branches;
  4. ROs;
  5. factories and workshops;
  6. places where natural resources are extracted or exploited;
  7. farms;
  8. places where projects such as construction, installation, assembly, repair and exploration are undertaken;
  9. places where labour services are provided;
  10. business agents; and
  11. other places or establishments where production and business activities are undertaken.

The PE definition under China's tax treaties may override and serve to limit this broad definition of place or establishment under domestic law.

China has very limited domestic guidance on the attribution of profits to PEs. A non-resident enterprise with a place or establishment in China is required to keep complete accounting books and records to accurately calculate its taxable income in accordance with the principles of matching the functions performed and the risks borne. If a non-resident enterprise fails to accurately calculate its taxable income, the non-resident enterprise will be taxed using a deemed profit method. In practice, the deemed profit method is widely used, with profit rates ranging from 15 to 50 per cent.

A non-resident company may open a branch in China after obtaining approvals from the competent authorities, although in practice this has been limited mainly to the financial services sector. The EITL does not provide for a branch profits tax.