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Update: To which extent can international companies operate in China without being forced to pay taxes?

(January 28th, 2016)

Update: To which extent can international companies operate in China without being forced to pay taxes? Service provision and product order without having an office in the P.R.C.

Service provision:

A common topic among Chinese and German tax law is the legally conformant salary payment and taxation. International companies often are uncertain whether expatriates working in a foreign country should be taxed and charged in their home country or in China. Furthermore, it is often unclear how to process services and product orders without having an office in China. Read the following update with all relevant information on this topic.

Generally speaking, an international company without an office in China can handle all activities from their headquarter abroad. This also counts for all services provided by a foreign employee in China. However, in this case the tax aspect plays an important role, and two factors need to be distinguished:

A) It is to be examined whether there is a permanent establishment regarding the project in China, which includes the following criteria:

  • A place of service supply
  • A branch office
  • An agency
  • A workshop
  • A mine, oil or gas deposits, a quarry or any other place for production of natural resources

Usually a permanent establishment exists if the specified project takes longer than 183 days within the span of 12 months and can be assigned to the employees. The recently issued Announcement 19 gives further explanations for a more precise classification.

The delegating company justifies a permanent establishment in the following cases:

  • If the delegating company is responsible for the employee
  • If the delegating company assesses the employee’s work performance
  • If the establishment which supplies the services is “fixed” or “permanent”

Furthermore, there are five other reference factors to determine whether the employee is valuable for the hosting company in China:

  • The hosting company in China pays management fees for the delegating company or any fees related to service
  • The hosting company’s payment exceeds the salary, social insurance contribution and other expenses
  • The delegating company holds back a small part (as profit margin)
  • The employee’s Chinese income tax is not to be paid on those parts of the salary paid by the delegating company
  • The delegating company has the right to determine the right, amount, qualification, remuneration and place of operation for the employee in China

A permanent establishment is only completed after fulfilling those substantial criteria and at least one of the five reference factors.

If the requirements for a permanent establishment are fulfilled, it needs to be registered and the following taxes are levied:

  • Corporate Income Tax – 25% of the estimated profit
  • Value Added Tax – 6%
  • Individual Income Tax – 3-45% of the salary

 

B) If there is no permanent establishment (due to one of the reasons mentioned above), it has to be checked whether the employee is obliged to pay the Individual Income Tax in China. Employees can be send to China if the time span does not exceed 183 days within one calendar year, based on a double taxation treaty signed with China. If there is no contract between the company’s home country and China, the time span must not exceed 90 days within one calendar year. However please note that a new double taxation treaty between Germany and China comes into force probably this year and will have some serious alterations on the 183 days regulation.

Service provision and product order with a third-party involved:

Another common problem occurs when the parent company, the subsidiary in China and the customer or supplier is included in buying or selling services. It is common practice in China that a cash flow follows every service flow. This implies that every service flow between a third party and the Chinese subsidiary cannot have their parent company as the receiver or provider of the cash flow transaction. However it happens frequently and often challenges international companies in China. We are experts in this field, helping every client to master this situation. However solution approaches and alternatives depend on each case respectively.

For this we prepared a case study about import and cross border payment solutions with 3rd parties in China. Read more about the Chinese-German double taxation treaty here.

If you have any further concerning, please feel free to grace.shi@ecovis-beijing.com. Our team at ECOVIS Beijing would be very pleased helping you.

 

grace 2 Grace Shi is a partner at ECOVIS Beijing China. She has over 12 years of experience in accounting, auditing, and tax advisory services in both international accounting firms and large Chinese corporations. She has an international MBA and a US Global Finance Master’s degree. Since 2001, she is a Chinese Certified Public Accountant (CPA) and, since 2002, a Chinese Certified Taxation Agent (CTA). Mrs Shi is one of the founders of ECOVIS R&G Consulting Ltd. (Beijing). She has perfect skills in written and spoken English and Chinese. For more information, please contact:  grace.shi@ecovis-beijing.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 is 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, give us a call +49 (0) 6221-9985639 or contact us directly via  Beijing@ecovis.com .
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Author:
Richard Hoffmann
richard.hoffmann@ecovis.com
Office website

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