Laws of the People's Republic of China

Official Reply of the State Administration of Taxation about How to Determine the Permanent Establishment of Foreign Enterprises Providing Labor Services within the Territory of China and about Whom the Profits should be Attributed to

Guo Shui Han [2006] No. 694

1.

In the "permanent establishment" clause of tax treaties, permanent establishments include "the furnishing of services, including consultancy services, by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or a connected project for a period or periods aggregating more than six months within any twelve-month period." In practice, where a foreign enterprise has no permanent establishment within the territory of China and only sends its employees to provide services, including consultancy services, for a connected project within the territory of China, if these employees' actual working period or periods aggregates more than six months within any twelve-month period, it is safe to determine that this foreign enterprise has a permanent establishment within the territory of China.

2.

Where a project lasts for several years and if the working period of any employees a foreign enterprise assign to China to provide services only in a certain period of over 6 months, but the working period of other employees a foreign enterprise assign to China to provide services is less than six months, it is still safe to determine that this foreign enterprise has a permanent establishment within the territory of China. This permanent establishment is based on all services the foreign enterprise provides for the related project rather than the services it provides in a certain period.

3.

Where a foreign enterprise has a permanent establishment providing services for a certain project through its employees within the territory of China, the related profits sourced from the services related to the project within the territory of China shall be considered as the profits of the permanent establishment and shall be taxed.

State Administration of Taxation

July 19, 2006