The Announcement on Corporate Income Tax Relating to Personnel Seconded by Nonresident Companies (Announcement No. 19) became effective on 1 June 2013. These regulations clarify various situations where a non-resident company may or may not constitute Permanent Establishment (PE) for PRC Corporate Income Tax (CIT) purpose.
A PE will be established where all the following factors are met:
- The domestic company makes payments in the nature of management fees or service fees to the non-resident company which is seconding the employees.
- The amount of payments made by the domestic company exceeds the wages, salaries, social security premiums and other costs paid in advance or on a commission basis by the non-resident company.
- The non-resident company reserves a certain amount of such payments made by the domestic company instead of delivering all of it to the seconded personnel.
- The seconded personnel fail to file individual income tax for the full salary income paid by non-resident company for secondment work.
- The non-resident company determines the number of seconded personnel as well as their qualifications, remuneration level and working place in China.
Announcement No. 19 also clarifies several documents that the in‑charge tax bureau should focus on during its evaluation including:
- Secondment agreement
- The company’s internal regulations and rules including specific provisions on seconded employee’s responsibilities, job description, performance evaluation, risksharing and other aspects
- Any payment made by the PRC company to the foreign company for such secondment, and the IIT filing record for such seconded employees
- Any agreement between the PRC company and the foreign company regarding offsetting payment, waiving the debt, or any related party transactions and other agreements with similar hidden payment