The Interpretation of the Agreement between the Government of the PRC and the Government of the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and the Protocol of the Agreement was promulgated by the State Administration of Taxation on 1 September 2010 ("Circular 75"). Although merely an interpretation of the PRC-Singapore tax treaty, it applies to all similar double tax treaty provisions and supersedes all previous treaty interpretations that are inconsistent with its contents.
Notably, concerning determination of a permanent establishment ("PE") of a nonresident enterprise based on a secondment arrangement for services provided in the PRC, Circular 75 formally outlines the criteria for determining a "real employer". The real employer is the entity that:
- has the right to direct the work of the personnel and undertakes responsibilities and risks related to the work;
- decides the number and qualifications of the assigned personnel;
- bears the salary of the personnel; or
- earns profit from the secondment.
These criteria should also be considered when determining the PE constitution of an overseas parent company that seconds personnel to its Chinese subsidiaries. If the parent company is the real employer and other PE factors are satisfied (e.g., regarding length of stay), such secondment would lead to the constitution of a PE of the parent company in China. If the Chinese subsidiary is the real employer, there is no PE risk for the parent company.
Circular 75 provides additional guidance for implementing current tax treaties. For instance, it defines the PE as a relatively fixed place of business through which the business of an enterprise is wholly or partly carried on, and explains in detail how to determine a construction PE or a service PE. Similar to other newly issued regulations, PRC tax authorities at different locations may assess the applicability of Circular 75 very differently. Therefore, confirmation with competent tax authorities on a case-by-case basis is necessary.
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.