Over the past few years, Chinese tax authorities have been
focusing increasingly on secondment (also referred to as
dispatchment) arrangements of foreign companies in China. Under a
secondment arrangement a foreign company assigns a foreign manager
to its Chinese subsidiary, while the employee remains an employee
of the foreign company. This structure is often used when there are
some specific benefits to keeping the manager on the other payroll,
or for example when the manager is only staying in China for a
short period of time. Secondment arrangements usually involve a
secondment fee, transferred from the subsidiary to the
The big question is whether a secondment arrangement must be
regarded as a services arrangement, under which a multinational
company which is not a Chinese tax resident seconds a manager to
work at a Chinese subsidiary. If this is the case – and
according to Chinese tax authorities this usually is the case
– the multinational company is considered to be subject to
Chinese corporate income tax as it has created a taxable presence
Public Notice 19
This issue has recently led to various legal disputes. Some
judges have ruled that multinational companies should pay tax in
China for these secondment arrangements, others are still ongoing.
In order to reduce the uncertainty, the China State Administration
of Taxation (SAT) recently issued Public Notice  no. 19.
Public Notice 19 (effective as of 1 June 2013), which tries to
provide a clear legal framework on how secondment arrangements
should be treated. It is important for multinational companies to
review their existing secondment arrangements in the lightof this
new public notice and adapt their arrangements accordingly.
Conditions and additional factors
Public Notice 19 states that if i) the multinational company
bears all or part of the risks and responsibilities related to the
work of the foreign manager and; ii) also regularly assesses the
work performance of the foreign manager, it is considered to have a
taxable presence in China. In that case, the multinational company
is subject to Chinese corporate income tax.
Besides these two conditions, Public Notice 19 also stipulates
five additional factors that should be considered before reaching a
conclusive decision, namely i) the Chinese subsidiary pays some
sort of management fee or service fee to the multinational company;
ii) the payment of the Chinese subsidiary exceeds the manager's
wage, additional salaries, social security payments and other
related payments (paid in advance by the multinational company);
iii) the multinational does not transfer the whole payment from the
Chinese subsidiary to the manager but retains a share of the
payment; iv) Individual income tax in China is not fully paid on
the total income of the manager borne by the multinational company;
v) the multinational company decides on work-related matters such
as payment, qualifications and working locations.
As one can easily recognize, the first three factors are mainly
used to determine whether the multinational company would gain from
such an arrangement. Furthermore, according to Public Notice 19
sending foreign managers to the Chinese subsidiaries merely to
exercise shareholder rights such as attending the AGM is not
considered as a taxable presence in China.
Documentation and information
Public Notice 19 also determines the documents and information
that the Chinese tax authorities may review when assessing a
particular secondment arrangement. According to Public Notice 19 it
is essential that government departments search for hidden
transactions that may be hidden by secondment arrangements. For
multinationals documentation is key, as they (together with the
Chinese subsidiary and the foreign manager) will need to prove the
nature of their secondment arrangement.
As Public Notice 19 was only issued last June, it will have to
be seen how this notice works out in practice and whether it indeed
provides the highly needed clarifications.
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.
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