On 19 April 2013, the State Administration of Taxation issued the 19th announcement of this year “Announcement on Issues concerning the Collection of Corporate Income Tax (“CIT”) on the Provision of Labour Services by Personnel Dispatched by Non-resident Enterprises within China” (“Announcement 19”), which provides more specific criterion for determining whether a non PRC tax resident enterprise shall be deemed to have created an establishment/place of business or even a permanent establishment (“PE”) within the PRC by virtue of its secondment arrangement such that it shall be subject to the PRC CIT.
Announcement 19 provides that where a non PRC tax resident enterprise (“Dispatching Enterprise”) dispatches its employee (“Secondee”) to provide services within the PRC, if the Dispatching Enterprise undertakes part or all of the liabilities and risks arising from the work of such Secondee and normally assesses or evaluates his/her performance, the Dispatching Enterprise shall be deemed to have set up an establishment or place of business to provide services within the PRC; and that if the Dispatching Enterprise is a resident enterprise of a country/region which has entered into a tax treaty/arrangement with the PRC government and the aforementioned deemed establishment or place of business is relatively stable and long lasting (normally for a period or periods aggregating more than 6 months within any twelve-month period, depending on the relevant provisions under the applicable tax treaty/arrangement), such establishment or place of business shall constitute a PE of the Dispatching Enterprise within the PRC.
Besides the fundamental criterion mentioned above, 5 specific factors as set out under Announcement 19 shall be taken into account:-
1. the PRC entity which receives the services provided by the Secondee (“Host Enterprise”) makes any payment in a nature of management fee or service fee to the Dispatching Enterprise;
2. the amount of the payment made by the Host Enterprise to the Dispatching Enterprise is larger than that of the salary, remuneration, social insurance contribution and other expense of the Secondee paid or borne by the Dispatching Enterprise;
3. the Dispatching Enterprise retains part of the payment received from the Host Enterprise instead of distributing all of such payment to the Secondee;
4. the PRC Individual Income Tax (“IIT”) is not fully paid on the salary or remuneration of the Secondee which is borne by the Dispatching Enterprise;
5. the Dispatching Enterprise determines the number, qualification, remuneration standard of a Secondee and his/her work location in the PRC.
If the fundamental criterion is met and any one of the above factors is found under a secondment arrangement, there is a very good chance that such secondment arrangement will be deemed to constitute an establishment/place of business or a PE (as case may be) of the Dispatching Enterprise and the PRC CIT shall be paid in accordance with the relevant tax laws and regulations.
Among the 5 factors, the 4th one is particularly interesting. It is the first time that payment of the PRC IIT is taken as a factor to be considered in a CIT-related matter. It is not clear under Announcement 19 whether the salary or remuneration of a Secondee borne by the Dispatch Enterprise referred to in the 4th factor only limits to the salary or remuneration payable to the Secondee for his/her work within the PRC.
In light of the above, the key for determining whether an establishment/place of business of the Dispatching Enterprise is constituted under a secondment arrangement is whether the Secondee works for the Dispatching Enterprise or the Host Enterprise. If it is the former, the answer would be positive.
There is an exception under Announcement 19 that the provision of services by a Secondee to the Host Enterprise for the purpose of exercising the rights and protecting the interests of the Dispatching Enterprise as the investor of the Host Enterprise shall not be deemed to create an establishment/place of business or a PE of the Dispatching Enterprise.
Announcement 19 became effective on 1 June 2013. It is advisable for a non PRC tax resident enterprise which has dispatched or intends to dispatch its employee(s) to provide services within the PRC to review its secondment arrangement, assess the potential risks and adjust the arrangement if needed. Key documents in respect of the secondment arrangement shall be carefully prepared and kept for the competent tax authority's review.