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PRC clarifies rules on profits of PEs providing China services

The State Administration of Taxation of the People's Republic of China has issued a reply notice, Guo Shui Han [2006] 694, which confirms that a foreign company will be deemed to have a PE in China solely because of the provision of services by its employees for a project in China when the services meet the relevant threshold under the applicable treaty.

Most of China's tax treaties follow the UN model tax treaty, providing that a PE will be formed in China if a foreign company sends its employees or other personnel to provide services, including consultancy services, in China, and those services continue for the same project or a connected project for a period or aggregate periods totalling more than six months within any 12-month period.

Some treaties, including those with Mauritius and Cyprus, provide for a threshold period longer than six months. In a few treaties cases, notably the UK and Pakistan, no service PE clause is included.

All the services provided in connection with a project in China, not just services provided within a certain period, will be taken into account in applying the service PE rules. In the case of a project that lasts for several years, if the foreign company's employees were sent to China to provide services for more than six months during a certain period, the foreign company shall be deemed to have a PE, even though the provision of services in other periods has not been more than six months.

All profits arising from the provision of the services in China shall be considered profits attributable to the service PE and shall be taxable in China.

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