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Permanent Establishment and Taxes in China

When foreign companies provide services in China, there is a big concern for them: whether they need to pay taxes in China, how much taxes they need to pay and how to pay it. In practice, there are many different situations for foreign companies doing business in China. Different situations may involve in different tax items and different tax rates. Here we discuss one of the most complex situations: when a foreign company providing service in China will be treated as a Permanent Establishment (“PE”).

According to the agreements signed between Chinese government and other countries governments to avoid double taxation and prevent tax evasion, the term “permanent establishment” similarly comprise:
a) A building site, or construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than 6 months or 183 days;
b) The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 6 months or 183 days within any twelve-month period.

For the mentioned 6 months or 183 days, it is only counted when there is at least one employee sent by foreign countries working in China. If there is no person work in China in a period, then the period won’t be counted when calculating 6 months or 183 days.

If the foreign company is regarded as PE in China, they may need to pay corporate income tax (“CIT”), Value-added tax (“VAT”) and individual income tax (“IIT”) in China.

Generally speaking, it is very complex for foreign companies to do business in China. So, it would be better to consult a professional accounting firm in advance to fully understand the whole situation and related tax issues first, then the company can make some arrangements to adopt a relatively optimum approach to develop a business in China and gain good returns.

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