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Sending employees to China on a project basis? Avoid an unexpected Tax bill


By Steven Elsinga and Grace Tate, Dezan Shira & Associates

In addition to placing full time expatriate employees in China, as an investor, you may often need to send staff from the parent company to China to complete temporary projects. Common examples include quality control, engineering projects, training and consultancy. However, many foreign investors don’t know that such visits may result in the parent company being subject to a wide array of Chinese taxes. This may even be the case if the company has a subsidiary in China.

So how does this work? Obviously, a foreign-owned company incorporated in China is subject to Chinese tax. However, if a company registered abroad is deemed to have “permanent establishment” in China, it is also subject to Chinese taxes such as Corporate Income Tax, VAT and other local surcharges. This occurs if the foreign enterprise has a business venue or construction site in China, is represented in China by an agent, or – most relevant to the topic at hand – dispatches personnel to China to provide services. This includes services rendered to the local subsidiary.

It is important to note that the determination of permanent establishment can be applied retroactively. If the Chinese tax authorities determine that a foreign company has had a permanent establishment in China for the past several years, the company may suddenly be faced with a large tax bill.

Triggering permanent establishment

In the absence of a tax treaty with the country where the foreign entity is registered, China’s Corporate Income Tax Law stipulates when a nonresident enterprise is subject to tax in China. This occurs when an entity that is registered abroad has an office or premises in China, or if it derives income from China. Income derived from China, or connected to the premises (where present), is subject to Chinese Corporate Income Tax.

However, most countries have a double tax agreement (DTA) signed with China. The determination of permanent establishment under these treaties is more precise, but the details may differ per agreement.

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For example, when it comes to a Service Permanent Establishment (as distinct from Agent or Physical Premises) the U.S.-China DTA states that a nonresident enterprise has a permanent establishment if it sends people to provide services in China for more than six months (cumulatively) within any period of 12 months. This standard is applied quite strictly. As soon as an individual from that company spends one day of the month in China, it is counted as one month. So if the company had individuals on the ground in China for seven or more months within 12 months, it is considered to have permanent establishment.

Only when no individuals affiliated to the American company have been in China for six full months is there not a permanent establishment.

However, most DTAs that China has with foreign countries apply a different standard. Instead, these treaties count the number of days the entity had people in China, with the crossover number usually being 183 days within any period of 12 months.

If permanent establishment is determined under the DTA, the foreign entity will be liable for tax over the income earned in China, or income that is attributable to its presence in China.


The matter becomes interesting when the foreign entity in fact has a subsidiary with staff in China but also sends its people to China on projects, either to work with the subsidiary or for projects of its own. In the case of secondment, the parent company typically continues to pay the salary of the dispatched worker and reimburses these expenses from the local subsidiary. In instances where the Chinese subsidiary requests personnel be sent over and directs their work, that would not establish permanent establishment. In that case, Chinese tax authorities would tax the Chinese subsidiary for the income that was generated from the dispatched employees’ presence.

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However, the Chinese tax authorities will likely say permanent establishment applies when the overseas parent:

  • Manages the dispatched employees’ work
  • Determines how many people are sent
  • Bears the cost of the dispatched employees’ salaries
  • Obtains profit from the Chinese subsidiary for the assigned employees’ activities

If that happens, the overseas parent company will be subject to Chinese tax over the income generated in China.

Recommendations for HR teams

Short-term foreign assignments are characterized by time-sensitive decisions, which often coincide with a failure to proceed through HR channels. Bypassing HR can lead to triggering permanent establishment. While the triggering of permanent establishment is a tax matter, the HR department is in the best position to prevent this from happening. The human resources department ideally has the most information on what staff is sent on assignments where, and for how long. It is often also able to make arrangements to ensure that short-term assignments are seen as part of the subsidiary’s activities – not those of the parent company.

It is therefore prudent for foreign enterprises to clearly define their processes and policies with regards to short-term assignments.

Foreign enterprises should establish internal policies to:

  • Define assignment responsibilities to avoid too much control lying with the parent company.
  • Create cost allocation of short-term assignments between parent and subsidiary.
  • Document travel information to track time spent by dispatched employees in China.
  • Coordinate among the HR, finance and operational departments.

The exponential rise in international mobility means that foreign enterprises can no longer afford to neglect properly planning short-term assignments. Especially in emerging markets such as China, the tax implications of short-term assignments have attracted increased attention from tax authorities.

This article was first published on China Briefing.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.

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