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China – Clarification When Cross-Border Secondments Give Rise To Taxable Establishments.

3 June, 2013


Legal News & Analysis – Asia Pacific – China – Tax


New rules regarding seconded personnel and taxable establishments in China will be effective from 1 June 2013. We recommend that non-resident enterprises review, and where necessary amend, contracts and other documents that might result in additional tax in China.


The new rules are set out in the Announcement on Issues relating to Collection of Enterprise Income Tax on Services Provided by Personnel Dispatched by Non-resident Enterprises Within the Territory of China (Announcement), issued by the State Administration of Taxation (SAT) on 19 April 2013. The applicability of the Announcement to non-residents will remain subject to China’s double-tax treaties.




Under the China’s Enterprise Income Tax Law 2008, a non-resident enterprise may be subject to enterprise income tax (EIT) in China for income derived by its taxable establishment in China. The SAT may consider various factors in determining that a taxable establishment exists. The Announcement, however, is the first that explicitly addresses seconded personnel.


Applicable standards


The Announcement states that a taxable establishment will be created in China if the non-resident enterprise seconds personnel to work in China, and: (i) assumes part or all of the liability and risk for the work performed by seconded personnel; and (ii) is responsible for reviewing the performance of such seconded personnel.


In determining whether a taxable establishment exists, the SAT must have regard to whether the following factors exist:


  • the China-based entity pays management fees, service fees or any other payment of similar nature to the non-resident enterprise
  • the payments made by the China-based entity to the non-resident enterprise are more than just reimbursement of costs (e.g., salary, bonus, social security payment) associated with the seconded personnel
  • the non-resident enterprise retains a portion of the payments made by the China-based entity instead of transferring the amounts to the seconded personnel
  • individual income tax has not been fully paid in China on the salaries and bonuses of the seconded personnel
  • the number of the seconded personnel, their qualification, salary and working place are determined by the non-resident enterprise


If any of these factors is found to exist, then the China-based entity would likely be considered as a taxable establishment of the non-resident enterprise, and the non-resident enterprise would therefore be subject to Chinese EIT on income derived from that establishment.


The term of secondment to the China-based entity is not relevant under the Announcement. Thus a non-resident enterprise could end up with a taxable establishment on account of a very short-term secondment. However, any charge of EIT would also depend on any relevant double tax treaty (see below).                                            




A taxable establishment will not be created where the secondment is for the purpose of exercising shareholder rights and protecting the shareholder’s interests in the China-based entity. These activities may include advising the non-resident enterprise on its investments in the China-based entity, or attending shareholders meetings or board meetings of the China-based entity on behalf of the non-resident enterprise. This should bring relief to multinationals that second their senior management personnel to perform supervisory roles in China.


In addition, despite having a taxable establishment under the Announcement, a non-resident enterprise will not be subject to Chinese EIT unless they also have a “permanent establishment” in China under the relevant double-tax treaty. “Permanent establishment” is the corresponding term used and separately defined in China’s double-tax treaties. Some treaties, for instance, would require a secondment term of more than six months to constitute a permanent establishment.


Documents that may be reviewed


The Announcement sets out a range of documents that the SAT may require and review in order to determine whether a taxable establishment exists. Specifically, the SAT may review:


  • the contract or agreement by and between the China-based entity, the non-resident enterprise and seconded personnel
  • rules for the management of the seconded personnel, including specific provisions on their responsibilities, job descriptions, and performance reviews
  • payments made by the China-based entity to the non-resident enterprise, the accounting treatments of such payments, documents in relation to tax filings and payment of individual income tax for seconded personnel
  • information as to any hidden payments (e.g., offsets, abandoned claims and affiliated transactions) in relation to the seconded personnel




To minimize exposure to Chinese EIT, we recommend that each company with seconded employees in China thoroughly review their existing arrangements. Companies planning to second employees to China should also carefully review the arrangements.


The kinds of documents that might warrant special attention include:


  • Contracts and agreements between the non-resident enterprise and the China-based entity, and with seconded personnel; this would include contracts (such as technology licensing contracts) that commonly provide for secondments
  • Management rules regarding reporting lines, liability and performance reviews
  • Payment mechanisms, including the calculation of amounts payable and whether payments can be construed as reimbursements to the seconded personnel
  • Tax treatment of payments made to the seconded personnel


The Announcement suggests an ongoing effort by SAT to improve its tax collection on non-China-resident companies. The Announcement also reduces regulatory uncertainty as to relationship between seconded personnel and taxable establishments.


Non-resident enterprises should review existing and future secondment arrangements to ensure that they do not unintentionally end up with a taxable establishment China.



For further information, please contact:

Karen Ip, Partner, Herbert Smith Freehills


Betty Tam, Partner, Herbert Smith Freehills


Homegrown Tax Law Firms in China


International Tax Law Firms in China



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