Triggering Permanent Establishment in China Representative Offices

China-derived income key to understanding potential tax liabilities

Mar. 12 – The recent rulings by the State Administration of Tax concerning the taxable income of representative offices in China highlights an important status position in the activities of the RO – and the question of whether an RO is in fact operating as a permanent establishment or not. The issue has wide reaching implications, as it brings many ROs into PE status and signals a clampdown by the SAT on certain activities by them. Read the rest of this entry »

SAT Clarifies Implementation Issues for Corporate Income Tax

Mar. 12 – On February 22, the State Administration of Taxation published Circular 79 in an effort to clarify certain technical issues for corporate income tax purposes including the timing of income recognition, tax treatments for certain expenses, and the determination of tax basis for fixed assets.

This clarification relates tax treatment for expenses including those related to tax-exempt income, start-up expenses and business entertainment expenses. Read the rest of this entry »

Illegal Use of Company Chops Seemingly Endorsed in Beijing Court Ruling

Mar. 10 – A court in Beijing has awarded an employee of a foreign-invested advertising company RMB400,000 for wrongful dismissal after the employee was fired when she established a trade union using the company’s chop without permission, China National Radio reported on Tuesday.

The former human resources manager at R&D Advertising in Beijing, identified as Ms. Cui, sued the company last year, alleging that the company had fired her because of her union role. Read the rest of this entry »

RO Chief Representatives May Consider Power of Attorney in Tax Questioning

Op/Ed Commentary: Chris Devonshire-Ellis and Richard Hoffmann

Mar. 9 – With foreign company representative offices coming under intense scrutiny at the present time due to the changes in tax treatments levied from January 1, 2010, pressure is now on the chief representatives of China-based ROs to fully comply with tax audits and questions raised over their activities for the audit period 2009.

The State Administration of Tax issued Guoshuifa [2010] No. 18, issued on February 20, 2010, explicitly stipulates that ROs will need to pay corporate income tax on their taxable income, as well as sales tax and VAT. ROs will need to use the cost plus method or actual revenue method to determine their deemed profit margins, and under the new regulations, that deemed profit margin is to be no less than 15 percent, an increase from the previous deemed profit margin of 10 percent. Read the rest of this entry »

China to Loosen Publishing Laws

Mar. 9 – China is set to permit private investors to take a role in mainland publishing, the first time this will be permitted since the Communist party came to power in 1949.

China’s General Administration of Press and Publication stated last year that it would dilute the monopoly held by state publishing companies and to allow private publishers into the mainland market. This has now manifested itself in projected moves to bring the largest publishing house, China Publishing Group, to an IPO in Shanghai later this year in an offering expected to raise US$265 million. Read the rest of this entry »

China Curbs Property Speculation to Avert Real Estate Bubble

Mar. 8 – Whether or not it is an appropriate time to launch a property tax and curb skyrocketing housing prices in China has aroused hot debate at the annual sessions of the National People’s Congress, China’s top legislature, and the Chinese People’s Political Consultative Conference, the top advisory body.

China reintroduced a nationwide real estate sales tax last November in an attempt to reduce speculation and cool the bubbling property market after price rises accelerated across the country. Read the rest of this entry »

China RO vs. FICE

Op/Ed Commentary: Chris Devonshire-Ellis and Richard Hoffmann

Mar. 5 – Recent changes in China’s tax treatment of representative offices in the country have started to push the viability of using RO as a vehicle of “investment” into China in terms of increasing financial pressure.

While often stated as being an “investment” vehicle, alongside wholly foreign-owned enterprises and foreign-invested commercial enterprises, the reality is they have never been considered as a vehicle for foreign investment in the strictest sense. Firstly, there is no capitalization requirement, and therefore no “investment” by the foreign owner, and secondly, because they were not permitted to trade (trading may be allowed for ROs following new regulations issued in February, but this has not been clarified yet). Read the rest of this entry »

Expatriates Going Offshore in China Contracts? Think Again

Op/Ed Commentary:Chris Devonshire-Ellis and Richard Hoffmann

Mar. 5 – One symptom of the tightening of China’s economy and the impact of labor law is an increasing desire by Chinese employers to offset or reduce potential liabilities with their expatriate employees, such as expatriates employed by domestic Chinese companies being asked to establish an offshore company and to be paid through that in order “to help reduce the company tax burden.”

However, in doing so, expatriate employees may wish to consider that such moves are purely for the benefit of the employer and are certainly not for the advantage of the expatriate. Eschewing a perfectly good employment contract, in which the employee – including expatriate – rights are enshrined under China’s labor laws is not to the expatriates benefit. In fact, for expatriates who would undertake such a scheme, it would change the employee status by removing them from the payroll as an employee and onto a service contract as a company. This removes all labor law obligations towards the employee and does away with any need to pay them compensation, severance, etc. as would otherwise be due under China’s labor laws. Read the rest of this entry »

Seminar in Beijing Reviews 2010 China Tax Requirements

Mar. 5 – The Singapore Chamber of Commerce, the Danish Chamber of Commerce and the Israel Chamber of Commerce hosted an event on 2010 annual tax compliance and audit requirements for individuals and small and medium sized enterprises at the Westin Hotel in Beijing yesterday.

Keynote speaker Sabrina Zhang of Dezan Shira and Associates presented important considerations concerning bookkeeping requirements, tax filing obligations, and annual audit and tax compliance. She also noted that new representative office regulations had just been released and that local administration offices have yet to release further information on the implementation of these new rules. Read the rest of this entry »

SAT Increases Deemed Profit Rates for Representative Offices in China

Mar. 4 – Representative offices are no longer exempt from corporate income tax in China according to a recently issued circular by the State Administration of Taxation.

Guoshuifa [2010] No. 18, issued on February 20, 2010, explicitly stipulates that ROs shall pay corporate income tax on their taxable income, as well as sales tax and VAT, and will be required to assess CIT liability using a cost plus method or actual revenue method. Under either method, the deemed profit margin shall be no less than 15 percent, an increase from the previous deemed profit margin of 10 percent. The effective date of the measures is January 1, 2010. Read the rest of this entry »

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