Understanding Permanent Establishment in China – A Guide for Foreign Companies

Assessing what triggers permanent establishment status is key to determining whether a non-resident company in China is liable to pay corporate income tax on income under the country’s network of double taxation agreements. The term is defined across domestic tax laws and implementing regulations, as well as international treaties, making it difficult for companies to ascertain which activities could constitute permanent establishment in China and thereby trigger tax liabilities.

Permanent establishment (PE) is a key concept in international tax treaties, primarily used to determine which contracting state has the right to tax the profits of an enterprise from the other state. For non-resident enterprises from a country with an active double taxation avoidance agreement (DTA) with China, understanding what constitutes a PE is crucial for determining its tax liability.

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In China, the determination of a PE is governed by a combination of domestic tax law and international treaty obligations. Specifically, resident and PE status in China is determined by the country’s Corporate Income Tax (CIT) Law, the Implementing Regulations of the CIT Law (the Implementing Regulations”), and the country’s network of DTAs reached with 114 countries, as well as guiding implementation documents. While China’s DTAs adopt broadly similar PE concepts as in other countries, their application and interpretation on the ground can materially affect whether and to what extent an NRE’s profits are taxable in China.

PE and source country’s taxing rights 

This concept of PE is critical because it determines whether a foreign enterprise has sufficient presence in China to be subject to Chinese taxation on its business profits. 

For example, under Article 7 of the China-Singapore tax treaty, China shall not tax the profits of a Singapore enterprise unless the enterprise carries on business through a PE situated in China. In other words, China only has the right to tax the business profits of a Singapore enterprise if that enterprise conducts business activities through a PE in China.   

The underlying principle is that a PE signifies substantial participation in the source country’s economic activities, thereby granting the source country taxing rights. The scope of what constitutes a PE directly affects the allocation of taxing rights between the residence country and the source country. 

PE versus non-PE: Tax differences 

For non-resident enterprises, the tax difference between PE and a non-PE status primarily relates to how profits are taxed in the source country.

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If a foreign enterprise has a PE in China, China can tax the profits attributable to that PE under the applicable tax treaty and domestic law. The enterprise is generally subject to China’s CIT at the standard tax rate of 25 percent on the profits allocated to the PE. The PE may also be liable for valued added tax (VAT), surcharges, and withholding obligations on certain payments. Compliance requirements include maintaining books and records, filing CIT returns, and possibly undergoing tax audits. 

If no PE exists, the foreign enterprise is not taxed on business profits in China, though payments from China to the foreign enterprise (such as for services, royalties, and interest) may still be subject to withholding tax, typically at a rate of 10 percent, depending on treaty benefits. The foreign enterprise avoids the complexity of full CIT compliance but must manage withholding tax obligations and ensure proper documentation for treaty relief. 

To put it simply, having a PE usually results in higher tax exposure and compliance obligations, while non-PE status limits taxation to withholding on specific payments. Businesses often structure operations to avoid creating a PE unless necessary. 

What constitutes a PE 

The definition of a PE across China’s DTAs is broadly similar. Taking the UK-China DTA as an example, a PE is defined as “a fixed place of business through which the business of an enterprise is wholly or partly carried on”. 

To qualify as a PE, the place of business must exhibit three essential characteristics: 

• Fixed location: There must be a stable center of operations with identifiable boundaries and commercial or geographic consistency. While the site need not be immovable, it must serve as a fixed base for business activities. Without this fixed nature, PE cannot exist, even if activities last for an extended period.
• Continuity: The duration of the business presence matters. A location intended for long-term use may constitute PE even if operations end prematurely. Conversely, short-term setups generally do not qualify unless they exceed temporary thresholds.
• Business activity: Only sites engaged in core business functions qualify as PEs. Preparatory or auxiliary activities, such as storage, display of goods, purchasing, or information gathering, are excluded under treaty provisions. 

Accordingly, PE usually covers below: 

1. A place of management (defined as an office or other place that represents the enterprise and assumes some management responsibilities – this is different both from the head office and the “actual place of management” used to determine whether a company is an RE under the CIT Law);
2. A branch;
3. An office;
4. A factory;
5. A workshop;
6. A mine, an oil or gas well, a quarry or any other place of extraction of natural resources (refers to a place that has been invested in, possesses exploitation rights or related contractual interests, and engages in production and operation); and
7. An installation or structure used for the exploration or exploitation of natural resources. 

In addition, the term PE also includes two specific situations under tax treaties: 

1. Construction sites and related activities: A PE covers a building site, construction, assembly, or installation project, as well as related supervisory or management activities, but only if the site, project, or activities last for more than 12 consecutive months.
2. Service provision through personnel: A PE is deemed to exist when an enterprise of one contracting state provides services, including consulting services, in the other state through employees or other engaged personnel. This applies only if such activities (for the same project or related projects) continue for 183 days or more, whether consecutively or cumulatively, within any 12-month period that overlaps the relevant tax year. 

These rules aim to capture situations where a foreign enterprise has a significant and sustained presence in the source country, even without a fixed physical office, thereby granting the source country taxing rights. 

Note that the below activities usually do not constitute a PE as they are only preparatory or auxiliary activities: 

1. The use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
2. The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;
3. The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
4. The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;
5. The maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; and
6. The maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. 

Common types of PE 

There are broadly four categories of PEs in China’s DTAs: fixed place PE, construction PE, services PE, and agency PE. In 2010, the State Tax Administration (STA) released the Interpretation Notes for the DTA between China and Singapore (Guoshuifa [2010] No. 75), which provides a detailed description of the types of PEs that can be established under the China-Singapore DTA between China and Singapore, and is applicable to similar provisions in the DTAs China has concluded with other countries. 

Fixed place PE 

A fixed place PE exists where a company has a physical place of business in China through which all or part of its business activities are carried out. The place must have a certain degree of permanence, but there is no restriction on size or scope. Temporary interruptions do not affect permanence, and a place established for short-term use may still constitute a PE if its actual existence is not temporary. Conversely, a place intended to be permanent may still be regarded as a PE even if it existed only for a short period due to early termination. 

Construction PE 

A construction PE arises from a building site, construction, assembly or installation project, or related supervisory activities carried out in China, but only where such activities continue for six months or more (or twelve months under certain DTAs). The relevant period is calculated from the commencement of contract implementation, including preparatory work, through completion and handover, including trial operations. Where the time threshold is not met, no PE is constituted. 

Services PE 

A services PE is constituted where a company provides services, including consultancy services, in China through its employees or other personnel engaged by the company. A PE arises if, within any 12-month period, such personnel are present in China for a continuous or cumulative period exceeding 183 days for the purpose of providing services. The personnel must be under the company’s control and direction, and the services typically include professional services such as engineering, technology, management, design, training, and consulting. 

Agency PE 

An agency PE exists where a person acting on behalf of a company in China has and habitually exercises authority to conclude contracts on behalf of the company. An agent will not constitute a PE if it is independent both legally and economically and acts in the ordinary course of its business. Independence is assessed by reference to factors such as commercial autonomy, risk assumption, the number of principals represented, and reliance on the agent’s professional expertise. Where an agent combines independent activities with contract-signing authority on behalf of the company, it will be treated as a non-independent agent and constitute a PE. 

Considerations for foreign companies 

For foreign companies operating in or with China, careful management of on-the-ground activities is essential to avoid inadvertently triggering PE status. In practice, PE risks mostly arise from the duration and substance of activities, as well as formal registrations. Companies should closely monitor how long construction, installation, or service activities are carried out in China, how frequently personnel are present, and whether activities that are intended to be preparatory or auxiliary remain limited in scope.

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It is also important to be aware of the risks of triggering PE status through the use of local agents and representatives. Granting contract-concluding authority or allowing agents to habitually play a principal role in commercial decision-making can readily give rise to an agency PE if independence cannot be clearly demonstrated. Maintaining clear contractual boundaries, documenting the independence of agents, and regularly reviewing operational arrangements against both China’s domestic tax rules and applicable DTAs can help foreign companies manage PE exposure and reduce the risk of unexpected CIT liabilities.

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