CHINA Law and Practice Contributed by: Mei Zhang, DaHui Lawyers
• Other income (interest, dividends, property income, etc): This is levied on a transactional basis and is generally subject to a flat tax rate of 20%. 2.5 Tax Residence of Legal Entities In accordance with the PRC CIT Law, the tax-resident status of a legal entity in Mainland China is determined based on either of the following two criteria. • place of registration: enterprises, public institu - tions, social organisations, and other income- generating organisations legally established within Mainland China; or • location of managing institution: refers to enterpris - es that are established in foreign countries (regions) but hold their “actual management institutions” in Mainland China (the term “actual management institution” refers to organisations that compre - hensively manage and control the production and operation, staff, accounting, property, and other aspects of the enterprise). 2.6 Definition of Permanent Establishment China’s definition of a permanent establishment (“PE”) operates under a dual framework: a broader concept under domestic law and a more specific, treaty-based concept that aligns with international norms (ie, the OECD Model Tax Convention) while protecting its source taxation rights. Domestic Law Foundation: “Establishments or Places” According to Article 2 of the PRC CIT Law and Arti - cle 5 of its Implementation Rules, there are two main types of institutions or establishments registered by non-resident enterprises in Mainland China: • fixed places of business – these encompass a wide range of physical locations used for production or business operations, such as management offices, factories, service provision sites, construction/ installation projects, etc; and • dependent agents – a non-resident enterprise may also create a taxable presence by authorising an agent in China to habitually conclude contracts or perform core functions on its behalf.
Establishing such an “institution or place” under domestic law creates a general tax nexus but does not automatically equate to forming a PE as defined in a DTA. The PE threshold under treaties is typically
more stringent. Treaty Practice
While China’s DTAs incorporate core principles from the OECD Model Tax Convention, the OECD Model positions on key PE issues more closely resemble the UN Model, favouring rules that better protect the taxing rights of source countries (like China) where income arises. The key distinctions are evident in two areas: • Service provision through personnel clause – Regarding special types of PEs, the UN Model Tax Convention adds a category of service-type PE, which stipulates that “the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue within that country for a period or periods aggregating more than six months within any twelve-month period”. Most tax treaties signed by China with foreign countries refer to the provisions of the UN Model Tax Convention on this clause. • Construction sites and related activities – The OECD Model Tax Convention stipulates that “the term ‘permanent establishment’ includes a build - ing site or construction or installation project, but only if such site or project lasts more than twelve months”. The UN Model Tax Convention lowers the 12-month designated period to six months and includes “assembly projects and supervision and management activities related to building sites, construction, assembly or installation projects” as possible conditions for determining the existence of a PE, to better safeguard the interests of devel - oping countries. Most tax treaties signed by China adopt the six-month or 12-month standard, with some exceptions for specific treaty partners.
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