Understanding Permanent Establishments in China

Published: May 2013

With an increasing number of foreign enterprises starting to conduct business in China, tax liabilities resulting from business activities in China are quickly becoming an issue of key concern. Many foreign enterprises that conduct business in China are unaware that their business activities here may constitute a permanent establishment (“PE”), which thus subjects them to corporate income tax.

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In this issue:

  • Triggering Permanent Establishment Status
  • Tax Implications of a Service Permanent Establishment
  • Does a Representative Office Constitute a Permanent Establishment?
  • Countries with Double Taxation Avoidance Agreements with China

With an increasing number of foreign enterprises starting to conduct business in China, tax liabilities resulting from business activities in China are quickly becoming an issue of key concern. Many foreign enterprises that conduct business in China are unaware that their business activities here may constitute a permanent establishment (“PE”), which thus subjects them to corporate income tax.

In recent years, China’s tax authorities have tightened the tax administration of expatriate secondment arrangements, whereby overseas parent companies may be challenged that their actions constitute provision of services to their China subsidiary and, hence, result in the creation of a Service PE in China.

This month’s issue of China Briefing Magazine casts some light on this subject by discussing the circumstances that trigger the creation of a PE in China, focusing on Service PE, in the first article. In the second article, we discuss the tax implications for a non-resident enterprise where its activities constitute a Service PE in China.

At the end of the magazine, we also address the taxation of representative offices in China and list the countries and regions that have DTAs with China. We hope that a better understanding of this subject will allow foreign investors to plan their activities in China more efficiently.

 


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