May 7 – Representative offices (ROs) are taxed as permanent establishments in China. The “Interim Measures for the Administration of Tax Collection against Permanent Representative Offices (ROs) of Foreign Enterprises (guoshuifa No. 18 )” issued by the State Administration of Taxation generally provides that ROs are required to pay corporate income tax on its profits, as well as business tax and value-added tax, which usually amounts to a liability of approximately 11 percent to 12 percent of the total expenses of the RO. ROs are required to keep proper accounting records to ascertain their actual revenues and profits and also accordingly file taxes.
Representative offices that cannot determine their profits on an actual basis must ascertain their deemed tax value by either using the expenditure-plus method or the actual revenue deemed profit method. Under either method, the deemed profit margin is no less than 15 percent. The expenditure-plus method is currently the most common method for RO tax filings and least likely to be challenged by tax authorities. Under this method, the expense of running the RO is used as the basis for tax calculation. The most common expenses faced by the RO are often rent, administrative costs and salaries.
Under very rare circumstances, i.e., where the RO is established by a foreign government or non-profit organization, a RO can apply for and enjoy tax exemption.
Portions of this article came from the May 2013 issue of China Briefing Magazine titled, “Understanding Permanent Establishments in China.” This month’s China Briefing Magazine casts some light on permanent establishment status in China by discussing the circumstances triggering a PE in China, focusing on Service PEs. We also discuss the tax implications for a non-resident enterprise where its activities in China constitute a Service PE in the country, and address the taxation of representative offices.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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