Background

A long-disputed issue is whether a secondment arrangement (assignment) under which a non-Chinese-tax-resident enterprise (assigner) seconds an individual (assignee) to work at a Chinese enterprise (recipient) should be regarded as the assigner's provision of services in the People's Republic of China (PRC) or as the assignee's employment with the recipient. If the assigner is considered to have rendered services in the PRC via the secondee, the assigner may be considered to have created a Chinese taxable presence and thus be subject to Chinese corporate income tax. In 2010, the Chinese State Administration of Taxation (SAT) provided guidance in Guo Shui Fa [2010] No. 75 (Circular 75) regarding how a secondment arrangement may expose a non-Chinese-tax-resident enterprise to Chinese corporate income tax. However, Circular 75 is limited to a situation where there is a tax treaty between China and the assigner's tax jurisdiction for an assignment between the parent company and its subsidiary. As a result, the treatment for other arrangements was uncertain. The SAT recently issued Announcement of the SAT [2013] No. 19 (Announcement 19), providing clarification for other arrangements.1 The following is a summary of the salient points in Announcement 19.

Summary

Effective June 1, 2013, Announcement 19 clarifies the situations in which a secondment arrangement may expose a foreign company to a challenge regarding Chinese taxable presence. Announcement 19 says that if the assigner bears part or all of the responsibilities and risks related to the assignee's work, as well as regularly assesses the work performance of the assignee, the secondment arrangement should be viewed as the Chinese taxable presence of the assigner for providing the services in the PRC. In arriving at any decision, all of the following five factors should be considered. The following table compares factors in Announcement 19 with those in Circular 75 for determining whether a secondment arrangement would create a Chinese taxable presence to a non-Chinese-tax-resident enterprise.

Announcement 19 Circular 75
All of the following five factors should be considered, in conjunction with the information above, in determining if a PRC taxable presence has been created. The five factors are:

  1. the recipient in China makes payments in the nature of the management fee or service fee to the assigner;
  2. the recipient's payment to the assigner exceeds the assignee's wages, salaries, social security contributions and other expenses borne by the assigner;
  3. the assigner does not pass along all the related payments received from the recipient to the assignee and retains some portion of the payments;
  4. PRC individual income tax is not paid on the total amount of the assignee's wages and salaries borne by the assigner; and
  5. the assigner decides the number, qualifications, remuneration and working locations of the assignee in China.
 A PRC taxable presence may be created for the parent if one of the four situations exists:

  1. the parent company is authorized to instruct the individual regarding work and bears relevant risks and responsibilities;
  2. the parent company pays the individual's salary;
  3. the parent company derives profits from the Chinese subsidiary due to the dispatch; or
  4. the parent company decides the number and qualifications of individuals assigned to the subsidiary.

Implications

We suggest that foreign companies with existing secondment arrangements in the PRC immediately review those arrangements, determine the implications and take appropriate action. Foreign companies planning to enter a secondment arrangement should note this development for planning.

Footnote

[1] Announcement 19 states that if the assignees are seconded to the PRC for the purposes of carrying out stewardship functions, protecting shareholders' interest including investment suggestions, attending board meetings and activities, such arrangement should not constitute a Chinese taxable presence to the non-Chinese-tax-resident enterprise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.