Up to the end of 2011, China had entered into double tax agreements (the DTA) with about 96 countries (and regions). The contents of those DTA’s are basically modeled on that of the “Model Tax Convention” of the OECD.
Taxation of permanent establishments in China
First, The term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term"permanent establishment" includes especially: a place of management, a branch, an office, a factory, a workshop and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
Second, the term"permanent establishment" likewise encompasses:
(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 6 months;
(b) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if such activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 6 months within any twelve-month period.
Note 1: In the above second paragraph, the signing parties divide the overlapping tax jurisdictions with reference to the duration of activities the personnel of one side is assigned to perform on the other side.
Third, notwithstanding the preceding provisions, the term "permanent establishment" 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 activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or
auxiliary character.
Principle source jurisdiction: Permanent establishment
Reference: http://www.china-tax.net/pub/Article4.pdf
Note 2: On the one hand, the activities that do not constitute a permanent establishment are types of non-taxable activities. To determine whether the taxpayer is under a legal obligation to pay income tax, the taxpayer must apply for a “certificate of non-taxation” from the tax authority in-charge. On the other hand, there are six categories of activities that fall within the scope of taxable activities but for the tax-exempt provision. The taxpayer can submit an application for a “certificate of tax exemption” in order to enjoy the tax exemption in accordance with the law.
Fourth, dependent agent
Where a person - other than an agent of an independent status to whom the following paragraph applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, has and habitually exercises an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those paragraphs as mentioned above which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.
Fifth, independent agent
An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, and conditions are made or imposed between that enterprise and the agent in their commercial and financial relations which differ from those which would have been made between independent enterprises, he will not be considered an agent of an independent status within the meaning of this paragraph.
Sixth, company holding equity interests
The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, shall not of itself constitute either company a permanent establishment of the other.
Seventh, income tax obligation arising from permanent establishment
According to the PRC Enterprise Income Tax Law, any non-resident companies or individuals that have set up, or are deemed to have set up, a permanent establishment in China shall have the legal obligation to pay corporate income tax on China-source income as earned by the permanent establishment.
Note 3: In spite of the above provisions for tax exemption, it does not follow that the taxpayer at issue can automatically be granted the tax concession. Instead, the taxpayer must submit an application to the administrative authority for the granting of the tax concession. After obtaining the written approval from the tax administration, the taxpayer can enjoy the tax concession in accordance with the law.
