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International Businesses

Permanent Establishment in China

Posted on March 13, 2018 by

Tim Hilligoss

Tim Hilligoss

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As more and more foreign companies start to consider China as one of their most important markets, they have been putting more resources to gain China’s market share. With the increased amount of business activities, a question often asked is when is activity in China taxed, and at what rate.

Under current Chinese Corporate Income Tax (CIT) Law, when a foreign entity does not have a permanent establishment (PE) in China, it is only subject to CIT at a withholding tax rate of 10% on the China-sourced income, including but not limited to interest, dividend, rental, royalty, income from property transfer, donations and etc.

If a foreign entity has a permanent establishment (PE) in China that falls into one of the following four PE categories, it will be subject to a 25% CIT on both China sourced income and non-China sourced income that is connected to this PE. We will discuss the four types of PE in details below:

1. Physical PE – an entity has a business in China and the location is relatively fixed and the business is wholly or partially operated through that location. The list can include the following:

  1. Branch or office
  2. Factory
  3. Workshop
  4. A mine or place of extraction of natural resources
  5. A place of management

However, the following activities by themselves generally do not create a physical PE:

  • The use of facilities solely to store, display, or deliver goods belonging to an enterprise
  • The maintenance of a stock of goods belonging to the enterprise solely for the purpose of storage, display, delivery, or processing by another enterprise.
  • To maintain a fixed place of business solely to purchase goods or collect information or to carry on any other preparatory or auxiliary activity for the enterprise
  • Any form of combination of the above activities

2. Service PE – an entity dispatches its employees or other personnel to China to provide services in engineering, technology, management, designing, training, or consulting. If the services continue for more than 183 days or 6 months within any 12-month period. (183 days or 6 months depends on specific tax treaty with China).

3. Agent PE – an entity has a dependent agent who acts on behalf of the entity in China. This person also has authority to conclude contracts with other routine business decisions. However, an entity will not be considered to have a permanent establishment in China merely because it uses the services of a Chinese independent agent who acts in the ordinary course of business. Typically, the agents will be considered independent if they meet the following criteria, and they are not limited to lawyers, accountants, doctors, and sales commissioners:

  1. Acting in the agent’s own ordinary trade business
  2. Economically independent (not wholly or almost wholly rely on the target entity’s business)
  3. Legally independent

4. Construction/building site PE – an entity has a building site, construction, assembly or installation project, or supervisory activities in connection with, but only where such site, project or activities continue for a period of more than 6 months. The 6 month period starts from actual onsite preparation until the end of trial run. In some cases, a series of commercially and geographically interdependent projects are to be treated as a single project for the purpose of applying the six month test. For example, the equipment installation company can send two separate teams to China to install the equipment, one team is sent for 4 months for infrastructure building and the other team is sent for 3 months for actual equipment installation. The two teams don’t individually meet the 6 months test, but because the infrastructure building project is required for the actual equipment installation, they are considered as interdependent projects. Thus, they are treated as a single project and the entity meets the 6 months test.

In many cases, the owners of such foreign entities are not aware of PE concepts and as a result, the entities are subject to Chinese CIT liability. Entities that have PE in China can have penalties and interest assessed by the Chinese government if they have delinquent filings related to Chinese CIT. Please seek advice from our international tax professionals if you have any concerns about what was discussed above.

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Tim Hilligoss


As a trusted advisor, Tim guides clients through business transactions, tax issues and international expansion.

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