China Tax & Investment News | The assessment of Permanent Establishments under the COVID-19 context

China Tax & Investment News (CTIN) is a bilingual thought leadership prepared by EY’s China Tax Center team and distributed in PDF to all EY clients which have subscribed to EY email notifications. Different from China Tax & Investment Express (CTIE), which is a weekly quick briefing on multiple rules/regulations/polices officially issued in that period, CTIN – normally focusing on one ruling or one type of issues/industries each issue -  provides more detailed interpretation and in-depth business implication analysis on significant policies as well as trends of development in tax and business related areas.

According to the prevailing China Corporate Income Tax (CIT) law, a non-resident enterprise (non-TRE) that has an establishment or place in China is subject to CIT on China-sourced income as well as on foreign-sourced income effectively connected with such China establishment or place. Non-TREs may apply tax treaty treatment where it is available and applicable. Under the context of tax treaty, the concept of Permanent Establishment (PE) provides the right of a Contracting State to tax the “business profits” of an enterprise of the other Contracting State. In other words, a Contracting State cannot tax the profits of an enterprise of the other Contracting State unless the enterprise carries on business through a PE constituted therein.

In early April this year, the OECD Secretariat released the “Analysis of Tax Treaties and the Impact of the COVID-19 Crisis” (hereinafter referred to as the “OECD Analysis” or “Analysis”), providing guidelines on tax treatments for treaty-related issues (including the creation of PE) which may arise due to the COVID-19 epidemic. The OECD recommends that tax administration should produce domestic regulations to address such treaty related issues. Nevertheless, the OECD recommendations have no binding effect on any countries/regions. In August, China’s State Taxation Administration provided its technical position via a written memorandum in Q&As format on its official website to address implementation issues related to certain provisions under tax treaty including assessment of PE under the context of COVID-19 epidemic.

This newsletter summarizes the key points of this OECD Analysis in respect of PE determination and introduces the corresponding special measures raised by certain countries including China under the COVID-19 context.

For more information, please contact your usual EY contact or one of the EY’s China tax leaders in the list attached at the end of this tax alert.