Laws of the People's Republic of China

State Administration of Taxation

Notice of the State Administration of Taxation on the Relevant Issues concerning the Determination of Permanent Establishments in Tax Agreements

Guo Shui Fa [2006] No. 35

The state taxation bureaus and local taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government, cities specifically designated in the state plan, and Institute of Continuing Tax Education of Yangzhou,

It is prescribed that the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried out by Paragraph 1 of Article 5 (Permanent Establishment) and the term "permanent establishment" shall not include the fixed business place established solely for of the enterprise itself to carry out preparatory or auxiliary activities by Paragraph 4 as in foreign tax agreements signed by our country prescribes that. We hereby give our explanations as follows about the terms "business" and "preparatory or auxiliary" and other issues concerning permanent establishment as follows in the light of the explanations of tax agreements sample of the United Nations and the Organization for Economic Co-operation and Development as well as the practices of most countries in the world:

I.

The Chinese term "yingye" is a literal translation of the English word "business", which includes not only business operations but also common business operations conducted by non-profit institutions. Therefore, if any non-profit institution of the other contracting party in a tax agreement carries out business operations, excluding the preparatory or auxiliary activities for the aforesaid institution, at a fixed base or place within China, it shall be regarded as "permanent establishment" in China.

II.

The principles as follows shall be observed when determining "preparatory or auxiliary" activities:

1.

Whether the fixed base or place only provides services to its head office or whether it has business relation with other entity;

2.

Whether the business nature of the fixed base or place is identical to that of its head office; and

3.

Whether the business operations of the fixed base or place are an important part of those of its head office.

If the fixed base or place not only provides services to its head office but also has business relation with other entity, or its business nature is identical to that of its head office and its business operations are an important part of those of its head office, the activities of such fixed base or place shall not be considered as preparatory or auxiliary activities.

III.

The individual income tax on the salaries and wages obtained by residents of the other signatory country for working at the permanent establishment shall be collected in accordance with the provisions on "non-independent personal services" (or "remunerations from employment") in the tax agreement and other relevant tax law of the State. The tax on the services provided for the government of a signatory country shall be collected or exempted in accordance with the provisions on "government services" in the tax agreement.

IV.

Where a taxpayer argues that its agency or place within the territory of China only provides preparatory or auxiliary services to its head office and is not a permanent establishment, it shall provide the relevant certification materials to the competent department of taxation and be followed to determination of the competent department of taxation.

State Administration of Taxation

March 14, 2006