In China, secondment arrangements generally involve the dispatching of secondees from a foreign enterprise (“the home entity”) to work for a Chinese affiliate (“the host entity”), with the compensation of the secondees to be reimbursed by the host entity to the home entity. Many Chinese tax authorities have taken the view that such reimbursement is in the nature of a payment for services rendered by the home entity, and the home entity has therefore created a taxable presence in China which and subject to China Corporate Income Tax (“CIT”).
The State Administration of Taxation (“SAT”) has been scrutinizing secondment arrangements which in effect are disguised service arrangements and may give rise to a taxable presence for the home entity. The SAT has recently issued a tax circular (2013)19 (“Circular 19”) providing further practical guidelines and documentation requirements on this matter.
Under Circular 19, the SAT considers the economic employer of the secondees as the fundamental factor in determining whether a taxable presence exists in China. The economic employer is the entity who bears the responsibilities and risks of the secondees’ work and normally evaluates and appraises the performance of the secondees. In addition, the following supplementary factors will also be reviewed:
If the home entity has satisfied the fundamental factor and considered to be the economic employer of the secondees, it would be regarded as having created a taxable presence in China if one of the other supplementary factors is also met. Noted however, Circular 19 clarified that no taxable presence should exist if the activities performed by the secondees in China are merely for protecting the shareholders’ interests, e.g. participating in shareholder or board meetings etc.
To a large extent, Circular 19 has provided greater clarity in the technical assessment and interpretation of SAT in examining secondment arrangements. However, the local practice of the in charge tax authority in applying Circular 19 may vary and remain unclear.
SAT has tightened up its enforcement approach on taxing foreign enterprises. Management should carefully review existing or an proposed secondment arrangements, evaluate the implications of Circular 19 and proactively address any tax risks so identified. It is also critical to review whether documentations required under Circular 19, such as secondment agreements, internal company policies, IIT filing records etc are all in place. The contents of these documents must be precisely phrased to reflect and substantiate that the host entity exhibits the characteristics as an economic employer, in order to support a genuine secondment arrangement and mitigate the Chinese corporate tax consequences for the home entity.
This article is published for general reference only. Readers shall obtain specific tax advice on the subjected matter before taking any actions.