China: Tax administration Q&As on permanent establishment and tax residence rules (COVID-19)

China: Permanent establishment and tax residence rules

The State Taxation Administration issued a set of “questions and answers” (Q&As) as guidance intended to clarify how the permanent establishment (PE) and tax residence rules will be applied in the context of the coronavirus (COVID-19) pandemic and the resulting disruptions to cross-border travel. These Q&A clarifications are of use to foreign businesses in assessing and limiting their China tax exposures.


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During the COVID-19 disruption period, many countries have imposed restrictions on cross-border travel. This has resulted in the staff of numerous enterprises—including their key executives—being “stranded” in jurisdictions that are not their normal locations of employment. In turn, this situation has raised business concerns with regard to PE and tax residence risks.

China’s tax administration issued the Q&As on 14 August 2020, and the Q&As cross-reference the most substantive piece of China tax guidance on treaty interpretation—Circular 75 (2010). 

Q&As address PE and tax residence rules

Fixed-place PE: For staff of a foreign company conducting “home office” work in China, the Q&As clarify that “intermittent and occasional” at home work activity generally does not result in a fixed-place PE.

PE is defined in tax treaties as a fixed place of business through which the business of an enterprise is wholly or partly conducted. Circular 75, drawing on elements of the OECD Model Treaty Commentary, provides that:

  • A place of business is relatively fixed, with a certain degree of permanence.
  • Conducting activities “through” a place of business applies to any situation when business activities are conducted at a particular location that is at the disposal of the enterprise.

However, in contrast to the OECD Model Treaty Commentary, Circular 75 does not provide any further guidance on meaning of “at the disposal of.” This has meant that foreign companies have struggled in the past to assess whether staff present in China at a location other than an office (e.g., at home, or at hotel or client premises) could give rise to a risk of PE. The Q&As now clarify that “intermittent and occasional” at home work activity during the COVID-19 disruption period should not result in fixed-place PE. This is in line with the OECD’s April 2020 guidance that temporary working at home should not result in PE, given that the situation lacks permanency and that working from home because of government movement and travel restrictions should not be viewed as putting an employee’s home at the disposal of the enterprise.

Agency PE: For staff of a foreign company conducting “at home work” in China, the Q&As clarify that “occasional” conclusion of contracts on behalf of the foreign enterprise should not result in an agency PE.

Tax treaties recognize an agency PE when an agent has and habitually exercises an authority to conclude contracts in the name of a foreign enterprise.  The Q&As recognize that occasional contract signing from a home office may not rise to this level. However, the Q&As qualify this by stating that agency PE might still be regarded as arising if the relevant staff had been acting in China on behalf of the enterprise for a long period of time before the COVID-19 disruption period or if their role has shifted for the longer term, as a consequence of COVID-19, to habitually concluding contracts for the foreign enterprise.

For more information, contact a KPMG tax professional:

David Ling | +1 609 874 4381 |

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