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Company secondment to China may result in tax liability

Published on Friday, 19 Jul 2013
Karen Ip
Betty Tam

The Announcement
Companies that second employees to China need to pay special attention if they do not wish to create a taxable establishment in the mainland, with new rules regarding seconded employees and taxable establishments put into effect on 1 June this year.

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 (“the announcement”), issued by the State Administration of Taxation (SAT) on 19 April 2013. Although the announcement might result in some companies being deemed to have taxable establishments in China, whether they are actually charged tax will depend on the terms of any relevant double-tax treaty.

Here we will focus on secondment arrangements that may give rise to taxable establishments under the announcement. It is, of course, better not to unintentionally end up with a taxable establishment than to be obliged to argue that a taxable establishment does not give rise to tax under a double-tax treaty.

Under 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. While the SAT considers various factors in determining the existence of a taxable establishment, the announcement is the first that explicitly addresses seconded personnel.

The Details
The announcement states that a taxable establishment will be created in China if the non-resident enterprise seconds personnel to work in China; assumes part or all of the liability and risk for the work performed by the seconded worker; and is responsible for reviewing the worker’s performance.

In making this determination, the SAT must take into account whether any of the following factors are present: the China-based entity (CBE) pays management fees, service fees or any other similar payment to the non-resident enterprise (NRE); payments made to the NRE are more than just reimbursement of the costs associated with the seconded personnel, such as salary, bonus and social security payments; the NRE retains a portion of the payments made by the China-based entity to the seconded personnel; individual income tax has not been fully paid in China on the salaries and bonuses of the seconded personnel; and whether the number of the seconded personnel, their qualification, salary and working place are determined by the NRE.

If any of these factors are found to exist, the CBE would likely be considered as a taxable establishment of the NRE. In turn, this means that the NRE, subject to any double-tax treaty, would be subject to Chinese EIT on income derived from the CBE.

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 CBE. These activities may include advising the NRE on its investments in the CBE, or attending shareholder meetings or board meetings of the CBE on behalf of the NRE. 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, an NRE 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, require a secondment term of more than six months to constitute a permanent establishment. As noted above, however, it would be better to not have a taxable establishment than to resort to arguments about the applicability of double-tax treaties.

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; and information as to any hidden payments, such as offsets, abandoned claims and affiliated transactions, in relation to the seconded personnel.

The Action Required
To minimise exposure to Chinese EIT, HR departments should work with their legal and tax departments to review existing and future secondment arrangements.

Several kinds of material warrant special attention. Contracts and agreements between the NRE and the CBE that create or provide for secondments – such as technology licensing contracts – should be reviewed, as should those with seconded personnel. Management rules regarding reporting lines, liability and performance reviews should be examined, together with payment mechanisms, including the calculation of amounts payable and whether payments can be construed as reimbursements to the seconded personnel. Finally, attention should also be given to tax treatment of payments made to the seconded personnel.

The announcement suggests an ongoing effort by the SAT to improve its tax collection from non-China-resident companies. Companies that second personnel to China should therefore take heed.


Karen Ip and Betty Tam are partners of Herbert Smith Freehills in Beijing and Shanghai, respectively. Herbert Smith Freehills has 2,800 lawyers and 460 partners in over 20 offices globally. It advises on dispute resolution and employment, among other areas.


The information contained in this article should not be relied on as legal advice and should not be regarded as a substitute for detailed advice in individual cases. If advice concerning individual problems or other expert assistance is required, the service of a competent professional adviser should be sought.

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