It has been a common practice for many multinational companies
("MNCs") to assign personnel from headquarters or other
offshore group companies to take senior positions within their
subsidiaries in China under secondment arrangements. In most cases,
expatriates will continue to be employed and paid by the offshore
entity. Such secondment arrangements allow the expatriates to keep
their offshore social insurance benefits (e.g., a 401k plan in the
United States). Because no local employment contract is signed, the
MNCs can also potentially avoid the application of employee
friendly employment regulations to their expatriates in China.
Moreover, it has been a general consensus among tax practitioners
and also a common practice of the tax authorities, that if the
expatriates work for and are controlled by the PRC affiliate only
while working in China, and the offshore entity gets reimbursed on
a cost basis without any mark-up, secondment arrangements should
not attract any PRC tax except individual income tax on the
expatriates' salary income.
Recently, some local tax bureaus have launched special tax audit
programs targeting MNCs (especially in the manufacturing and
service sectors) that second expatriates to work in their PRC
affiliates. The program is to focus on completing audits over the
coming two months. Based on no-name discussions with local tax
officials in Shanghai and Beijing and work with our contacts on the
same, the local tax authorities hold the opinion that all
secondments of expatriates to China will create a Permanent
Establishment ("PE") for the offshore employers, and the
offshore employers should pay enterprise income tax
("EIT") on a deemed profit basis (the deemed profit rate
is between 20% - 40%). The EIT rate is 25%. Furthermore, if the
offshore employers are deemed to be providing services in China, 5%
business tax ("BT") would also apply. This will
effectively add a tax burden ranging from 10% to 15% of the payroll
costs of expatriates. There is also a risk that taxes will be
If the PRC tax authorities follow-through on these audits, this
could represent a massive shift in the way expatriates can be
assigned to operations in China. Depending on how this develops,
MNCs may need to adjust their existing secondment arrangements as
well in order to manage the tax burden going forward. The tax
authorities are on questionable legal grounds if they assert that a
properly-structured secondment actually creates a PE, and further
that if a PE is created, there is actual income attributable to
Nonetheless, if the PRC tax authorities continue to impose EIT
and BT on all reimbursement payments, MNCs may need to consider
having the PRC affiliates pay the seconded expatriates directly to
avoid the risk of these taxes applying.
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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