ByTony DongDaisy Duan  and Jiang Junlu  King & Wood Mallesons Corporate Group

Over the years, it has been a common practice that multinational companies (“Home Entity”) dispatch expatriate employees (“Secondees”) to the affiliated enterprise in China (“Host Entity”) to hold post as senior management or other technical position. Usually, the Home Entity and the Secondees would retain the employment relationship and the Home Entity continues to pay the salaries and social security contribution for the Secondee in the home country, which would be reimbursed by the Host Entity. Since the tax clearance certificate issued by Chinese tax authority is required when the Host Entity makes remittance overseas for the reimbursement payment, the tax authority needs to determine whether the Home Entity constitutes the establishment/place of business (“taxable presence”) or permanent establishment (“PE”) under the relevant tax treaty under the secondment arrangement, which may result in PRC Enterprise Income Tax (“EIT”) consequence for the Home Entity. Nevertheless, there are often disagreements between tax authorities and the Host Entity due to the ambiguity of tax regulations in the assessment of taxable presence or PE under cross-border secondment arrangement, and consequently Host Entity has difficulty in obtaining the tax clearance certificates and cannot remit the payment to the overseas Home Entity. There will be a change from June 1st, 2013.
Continue Reading China Tax: Unveiling the International Secondment Arrangement