Feb. 12 – The State Administration of Taxation has issued a circular clarifying issues raised by local tax bureaus for transitional tax treatments for technology-transfer-related services.

Circular Guoshuihan [2010] No. 46 is meant as a supplement to the implementation of an earlier Circular 507 issued in September 2009. The implementation of Circular 507 led to disputes between foreign technology-providers and local tax authorities in Southern China in terms of applicable tax treatments for technology-transfer-related services and associated individual income tax issues.

Under Circular 46, technology-transfer-related services are considered as part of the technology transfer allowing for relevant service income to fall under the scope of royalties and shall be treated in accordance of the provisions of Royalties Article under Direct Tax Agreements (DTAs). The circular will not apply under the following conditions:

• The foreign technology-provider has sent personnel to China to support the adoption the use of the technology being transferred
• The time spent by the foreign personnel in China have constituted a permanent establishment for the foreign technology-provider
• Service income attributable to the permanent establishment shall be treated as business profit in accordance with the Business Profits Article under DTAs
• The foreign personnel shall be treated in accordance with the relevant Dependent Personal Services Article under DTAs

The provisions stated under Circular 507 and Circular 46 will be applicable to technology-transfer-related services begun prior to October 1, 2009 but not concluded by October 1, 2009, where no tax had been settled on the service part on October 1, 2009.

For technology-transfer-related services not yet finished by October 1, 2009, the whole service period of the foreign personnel (including the days prior to 1 October 2009) shall be included for the purpose of determining a permanent establishment.

For more help in reviewing the tax implications of technology-transfer agreements in China email tax@dezshira.com.