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FAQ about tax Issues on Secondment Agreement

It is a common practice for foreign companies (the Employer) to send foreign employees to work for subsidiaries in China on a sedondment basis, where the Employee maintains his or her employment relationship with the foreign Employer, but provides services to the Chinese subsidiary. The main advantage of the secondment arrangement over having the subsidiary directly entering employment relationship with the foreign Employees is that it avoids the governing of Chinese Labor Contract Law, which is in favor of the Employees.


The State Administration of Taxation became aware of such common practices and was consulted often by local tax department about how to impose tax on such practices, then released Bulletin [2013] No. 19 which went into effect on June 1st, 2013, “Announcement on Issues Concerning Levying Corporate Income Tax on Services Provided by Non-residents through Seconding Personnel to China” (Bulletin 19) to provide guidance regarding issues arising from secondment arrangements.


1.      What is the major issue Bulletin 19 expected to solve?

The income generated from the services provided by the foreign Employee working for the subsidiary is subject to corporate income tax, if the foreign Employee is deemed in substance to be a permanent establishment in China of such foreign Employer.


Bulletin 19 sets out a primary factor and several references factors for determining whether the permanent establishment exists in substance.

A.    The primary factors focuses on the employment relationship. If the foreign Employer bears any portion of the responsibilities and risks for the work performed by a secondee, and regularly evaluates his or her performance, the arrangement will, in principle, be considered to create a PE.

B.     Five reference factors that focus on the financial arrangement of a secondment arrangement:

i)                    The Chinese subsidiary pays the U.S. employer management fees or makes payments in the nature of service fees;

ii)                  The payments made by the Chinese subsidiary exceeds the secondees’ wages, salaries, social security contributions, and other expenses borne by the Chinese subsidiary to the secondees;

iii)                The U.S. employer does not pass on all the related payments made by the Chinese subsidiary to the secondee;

iv)                Individual income tax in China is not paid on the full amount of the secondee’s wages and salaries borne by the U.S. employer;

v)                  The U.S. employer decides the number, qualification, remuneration and working locations of secondees in China.

If the primary factor and any one of the reference factors are satisfied, the secondee will likely be considered the foreign Employee providing services in China and as such, this arrangement could have corporate income tax and business tax implications for a U.S. employer.


2.      What should the foreign employer do with regard to such stipulation?

Even though such stipulation makes the foreign employer facing tax risks, the foreign employer does not necessarily have to abandon the secondment arraggment.

Bulletin 19 indicates that the tax authorities will look at the following to determine if the primary factor and any reference factors have been satisfied:

i)                    The contract or agreement between the Chinese subsidiary, the U.S. company and the secondee;

ii)                  Rules for the management of the secondee, including those regarding their responsibilities, job description and performance reviws;

iii)                Payment made by the Chinese subsidiary to the U.S. employer relating to the secondment and how they were treated from an accounting perspective;

iv)                Chinese individual income tax paid by a secondee;

v)                  Hidden payments made by the Chinese subsidiary that could be related to the secondment arrangement(offsets, forgiving debt or third party transactions);


Secondment arrangements continue to be an important option for U.S. companies sending their employees to work for their Chinese subsidiaries. However, given the increased scrutiny of secondment arrangements by Chinese tax authorities, it is now more important to carefully structure these correctly than it has been in the past.

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