Corporate Income Tax – Part 2, Non-resident enterprise with a PE

By Richard Hoffmann, ECOVIS Beijing

Our last article covered the case of a non-resident enterprise without a permanent establishment. In this article, we will discuss the situation if you are a non-resident enterprise with a permanent establishment.

When it comes to Corporate Income Tax, you should pay attention because, on one hand, there are benefits you don’t want to miss, but on the other hand, there are losses and penalties you don’t want to risk. As a foreign business that has income from China, you may be subject to taxes from both your home country and in China. This could substantially increase your tax burden.

There are several criteria and cases identifying a Permanent Establishment.

Firstly, an establishment or place of business in China can be:

• a management, business establishment or an office,

• a factory, farm or a place of extraction of natural resources,

• a place providing services, place where a project of construction, installation, assembly, repair, exploration etc. is carried out or

• other establishments or places of business where production and business operations are carried out.

But there are some activities we need to pay attention to because they do not consider a PE in treaty provisions. For example, the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; the maintenance of the stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery or by another enterprise; as well as the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for advertising or for collecting information for the enterprise

Secondly, employees working in China must not exceed 6 months (180 days) continuously or cumulatively in any 12 month period or a calendar zear according to specific treaty provisions.

The last point concerns the appointment of an agent to conclude contracts and accept orders in China. This means a person in China acts on behalf of the non-resident enterprise and has the authority to conclude contracts in the name of the enterprise. Thus, if the agent is independent from the enterprise, both legally and economically, and if he is not engaged in any of the said enterprises’ other economic activities, the enterprise will not be considered as a PE.

How to treat active income

Active Income such as sales of good, provision of service, transfer of properties is subjected to a rate of 25% and is derived from an enterprise with a taxable presence. It is subjected to CIT. A taxable presence means that a particular foreign enterprise has set up or deemed to have set up a permanent establishment in the PRC. Foreign enterprises that have a permanent establishment in the PRC shall be subject to tax on all PRC-sourced income. The calculation is sometimes complicated since non-resident enterprises cannot declare the taxable income accurately due to incomplete accounting books or other reasons. Tax authorities are entitled to determine their taxable income using the following methods for different situations:

Using these methods, the tax authorities compare the calculated rates with the deemed profit rates depending on the business type. These deemed profit rates are:

Performance of engineering, design or labor service consultation: 15 -30 %

Provision Management Service: 30-50%

Other labor services or operations: no less than 15%

The tax authorities can apply a higher profit rate if they have evidence to believe that the actual profit rate significantly exceeds the prescribed ranges, It can also occur if the non-resident enterprises fail to provide true and valid proof for their expenditure. In this case, tax authorities may deem that all the services provided take place within China and therefore liable for CIT. Regarding the registration, non-residents need to complete tax registration with a tax bureau at the location of the project within 30 days after signing the contract. Also the CIT filing needs to be done according to CIT law and DIRs.
All in all we would recommend you to contact a professional to make sure you fulfill all restrictions. Furthermore we can help you to better plan your China projects when a PE is unnecessary, and optimize your tax burden.

with contribution of Brigitte Both (ECOVIS Beijing)

Richard Hoffmann is a Partner at ECOVIS Beijing China. Richard obtained an honor’s degree in law and worked in Germany, America and China for various prestigious law firms prior to joining ECOVIS. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV. Contact: richard.hoffmann@ecovis.com Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter or give us a call  +86 10-65616609 (ext 811/806)   or contact us directly via Beijing@ecovis.com