China tax: unveiling the International Secondment Arrangement

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By Tony Dong, Daisy Duan and Jiang Junlu

Over the years, it has been common practice for a multinational company (Home Entity) to dispatch expatriate employees (Secondees) to its affiliated enterprise in China (Host Entity) to hold senior management or other technical positions. Usually, the Home Entity and the Secondee will retain the employment relationship. The Home Entity will pay the salary and social security contribution for the Secondee in the home country, and will be reimbursed by the Host Entity. A Chinese tax clearance certificate is usually required when the Host Entity makes the reimbursement payment, so the Chinese tax authority needs to determine whether the
Home Entity constitutes an establishment/place of business (taxable presence) or a permanent establishment (PE) under the relevant tax treaty and thus be liable to Enterprise Income Tax (EIT) consequence in China.

The tax authorities and the Host Entity may have different views due to the ambiguity of tax regulations in the assessment of taxable presence or PE for cross-border secondment arrangements. As a result, the Host Entity often has difficulty in obtaining the tax clearance certificate and cannot remit the payment to its overseas Home Entity. The situation is likely to change from 1 June 2013.

On April 19, 2013, the State Administration of Taxation(SAT) issued the Announcement on Issues Concerning Enterprise Income Tax on Services Provided by Non-resident Enterprises through Seconding Personnel to China (Announcement 19)…

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