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SAT Provides Clarifications on PE Issues for Secondment

  • China
  • Employment law - HR E-Brief


Important new tax rules (Bulletin 19) were released in April by China’s State Administration of Taxation (“SAT”) and came into effect at the start of June.

The new rules clarify the criteria for determining when a permanent establishment (“PE”) is constituted by a foreign company via the secondment of an employee to a Chinese company.

The guidance outlines a two stage test for determining where the secondment actually establishes a PE. The two tests relate to a number of things including the level of control exercised by the foreign seconding company over the secondee.

Test for determining establishment

The first test is satisfied if both of the following are met:

  1. The foreign seconding company either fully or partially bears the responsibilities and risks of the secondee’s work; AND
  2. Performance appraisal is normally undertaken by the foreign seconding company.

The second test is satisfied if one of the following five factors arises in support of the first test:

  1. the Chinese host company pays management fees or service fees to the foreign company;
  2. the Chinese host company reimburses the foreign seconding company for salaries, remunerations, social insurance contributions and other expenses of the secondee, in excess of the actual costs;
  3. the foreign seconding company does not fully transfer the amount received from the Chinese host company to the secondee and retains a certain amount;
  4. the secondee’s remuneration is borne by the foreign seconding company but is not fully taxed in China; OR
  5. the foreign seconding company determines the number, job qualification, remuneration standard and working location in China.

Documentation and substance review

A tax authority will review the following documents related to a secondment in order to determine establishment of a PE:

  1. Any agreement between or amongst the foreign seconding company, the Chinese labour accepting company and the secondee;
  2. Management rules of secondees adopted by the foreign seconding company or the Chinese labour accepting company, including those provisions regulating job responsibilities, job content, performance review, risk bearing, etc.;
  3. Information on payments made by the Chinese labour accepting company to the foreign dispatching company, the associated accounting treatment, and the filling and settlement of Chinese individual income tax for the secondees; and
  4. Information on whether the Chinese host company made any hidden payments for secondment expenses by means of offsetting, waiver of debt, related party transactions, etc.

Importantly, where it is established that a PE exists, then the foreign company will be subject to Chinese corporate income tax.

Eversheds Comments:

Whilst some of the criteria for establishing a PE remain unclear and require further explanation, further development and local practice should be monitored.

Companies are advised to review their internal secondment documentation and assess the existing structure. Not only due to tax issues, but also with regard to employment laws, immigration requirements and social insurance handling as well as general HR considerations, direct employment structures and local contracts may be preferable – and not necessarily detrimental to either party.