SAT Guidance on Permanent Establishments in China During the COVID-19 Crisis
ISSUING AUTHORITY:
State Administration of Taxation
DATE OF ISSUANCE:
August 14, 2020
EFFECTIVE DATE:
August 14, 2020
The primary purpose of bilateral tax treaties is to establish which country has a taxing right in transactions affecting more than one country. Under China’s bilateral treaties, China may be able to tax the profits of a foreign company in a number of situations. Due to the COVID-19 outbreak, two of these criteria have come under particular scrutiny:
● China may tax the profits of overseas registered companies where such a company has a permanent establishment (PE) in China. A PE can be created by a presence of inanimate objects such as stock or machinery or by certain types of personnel.
● In addition, an overseas registered company can be taxable in China if the key decisions relating to that company are made in China. The current crisis has caused many key decision makers for companies around the world to work from home or to be temporarily based in countries they do not normally reside.
The above issues have caused concern for multinational companies. The SAT has clarified the following:
1. If an employee works from home on an intermittent and occasional basis, their home will not result in a PE.
2. If that employee occasionally concludes contracts from home during this COVID period, this will not give rise to an agency PE being created unless that person had been concluding such contracts for a long time prior to the COVID crisis.
3. The assessment of the place of effective management will not be affected. However, the SAT will take a broader look and consider the decision-making location under normal circumstances as well during the COVID disruption.
In summary, whilst companies may not need to worry too much about the temporary working arrangements for employees, less flexibility appears to be given to the key decision makers within the country. Overseas companies with key decision makers in China should carefully consider whether their place of effective management will be assessed to be in China. If so then they should immediately take steps to address this such as by preparing to submit a tax return in China detailing their global profits.
