China Individual Income Tax Guide (3) - Taxation on Foreign Individuals Working in Permanent Organization set up in China by the Countries with Bilateral Tax Agreement with China

1.    Permanent Organization

In accordance with Article 5 of the Tax Agreement between China and other countries, the term "permanent organization" means a fixed business site of through which the business of an enterprise is wholly or partly carried on. The term "permanent organization" includes especially:

(a)    a place of management

(b)    a branch

(c)    an office

(d)    a factory

(e)    a workshop, and

(f)    a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

The term "permanent organization" also includes:

(a)  a building site, a construction, assembly or installation project, or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than six months.

(b)  an installation, drilling rig or ship used for the exploration or exploitation of natural resources, but only if so, used for a period of more than three months; and

(c)  the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where such activities continue (for the same or a connected project) within the country for a period or periods aggregating more than six months within any twelve month period.

The term "permanent organization" shall be deemed not to include:

(a)  the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise.

(b)  the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery

(c)  the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise.

(d)  the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise.

(e)  the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character.

(f)   the maintenance of a fixed place of business solely for any combination of the activities mentioned in the subparagraphs (a) through (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

2.     Computation of the Time Period for Determining Permanent organization

In accordance with Cai Shui Xie Zi No.015 issued by the Ministry of Finance and the State Administration of Taxation (86), a building site, a construction, assembly or installation project, or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than six months under the Tax Agreement signed between China and foreign countries.

3.     Scope for Labor Service Provided for Construction Project and Term of Permanent organization

In accordance with Cai Shui Xie Zi No.015 issued by the Ministry of Finance and State Administration of Taxation (86), the permanent organization shall be deemed to furnish services, including consultancy services, by an enterprise of a Contracting State through employees or other personnel engaged by a foreign enterprise for such purpose, but only where such activities continue (for the same or a connected project) within China for a period or periods aggregating more than six months within any twelve month period under the Tax Agreement signed between China and foreign countries.

The computation for the term "a period or periods consecutive or cumulative more than six months within any twelve-month period may be limited by the year. The term of the permanent organization shall be a period or periods consecutive or cumulative more than six months within any twelve-month period as of the month of providing labor services pursuant to the contract.

4.    Treatment Under the Tax Agreement Enjoyed by the Branch Set in the Third Country

In accordance with Cai Shui Xie Zi No.015 issued by the Ministry of Finance and the State Administration of Taxation (86), the branch set by the resident company of the contracting state in the third country or region shall be the legal entity same as the resident company. If the branch engages in business operation or investment, unless otherwise specified by the Tax Agreement, provided that its head office shall be the resident company of the contracting state, the branch shall enjoy the treatment under the Avoidance of Double Taxation Agreement signed between China and the contracting state, however, the subsidiary set in the third country or region shall not enjoy the treatment of the Tax Agreement signed therebetween.

5.   Tax Liability of Foreign Individuals Employed in Permanente Establishment

In respect to the income derived by foreign individuals by virtue of their tenure of an office or employment from the permanent organization set by foreign enterprises in China, in accordance with the stipulations of the document Guo Shui Wai Zi No. 091 issued by the State Administration of Taxation [1989], provided that the contract project or work continue for a period of more than six months, which shall be deemed to have constituted permanent organization in China, the income from wage and salary shall be deducted from the taxable amount by the permanent organization, and the income of foreign individuals working in China shall be borne by the permanent organization. Foreign individuals working in China shall not enjoy the exemption treatment for no exceeding 183 days in terms of the length of residence under the Tax Agreement.