Permanent Establishment China

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In China, a PE is referred to as “a fixed place of business through which the business of an enterprises is wholly or partially carried out” (Guoshuifa – 2006 – No. 35). In this definition, “business” includes both production and operating activities, but also other activities carried out by non-profit organizations.

The concept of a Permanent Establishment is frequently used in double taxation avoidance agreements (DTAs). Depending on the DTA in place between two countries, a business can be taxed by a foreign country if a PE is constituted. When this happens the DTAs will prevail over a country’s domestic taxation legislation.

How are Permanent Establishments Defined?

Generally, China follows the principles described in the OECD Model and the UN Model for defining a Permanent Establishment. According to these and Chinese legislation, a foreign entity has a Permanent Establishment in China if it falls into one of the following categories:

1. Physical Permanent Establishments
2. Service Permanent Establishments
3. Agent Permanent Establishments
4. Building Site Permanent Establishments

Physical PE

As mentioned, a foreign entity in China with a relatively fixed location from which the entity wholly or partially operates can be constituted as a Permanent Establishment. According to the OECD Model this includes the following:

  • A place of management.
  • A branch or an office.
  • A factory.
  • A workshop
  • A mine, oil/gas well, a quarry and any other place where natural resources are extracted.

Furthermore, DTAs in place between China and other countries also define the following as a Permanent Establishment:

  • A warehouse related to a person providing storage facilities for others.
  • A farm or plantation.

It is however important to note that the use of facilities solely to store, display or deliver goods as well as maintenance of a stock of goods belonging to the entity solely for storing, displaying, delivering by another enterprise does not necessarily constitute a Permanent Establishment. Also, maintaining a fixed place of business to carry out preparatory or auxiliary activities does not necessarily constitute a PE.

Service PE

When (offshore) services are provided over a continuous period or cumulative period longer than 6 months (or 183 days) within a 12-month period (according to DTA regulations), authorities may impose CIT (in other words, a permanent establishment will be constituted.

Chinese tax authorities especially scrutinize intercompany service payments by Chinese subsidiaries to overseas parent companies, because they are often used to avoid tax or shift profits. Particularly when there is a lack of business substance, when the service fee payment is large, or the overseas parent is located in a low profit jurisdiction, the Chinese tax authorities are likely to conduct special anti-avoidance investigations.

Agent PE

If a non-resident enterprise utilizes an agent to carry out production and business activities in China (including signing of contracts and storing/delivering of goods), such an agent can be considered an agent of the non-resident enterprise in China.

However, this will not be the case if is considered independent by the Chinese tax authorities. Agents are independent if they meet the following criteria:

  • The agent acts on its own ordinary trade business.
  • The agent is economically independent
  • The agent is legally independent.

Building Site PE

In China a building site, construction, assembly or installation project, as well as supervisory activities related to a site or project lasting for a period of more than six months will be treated as a Permanent Establishment. This six-month period starts actual on-site preparation.


When researching this subject, we would recommend carefully reviewing the double taxation agreement between China and the country of the respective company, to include and understand whether any special arrangements have to be taken into account.

This is generally a contentious subject and as of our experience, the Chinese tax authorities are eager to tax any outward service agreements that take place between the foreign company and the local entity. Good research and understanding about China’s taxes is critical, to avoid any unnecessary tax burden.

If you have any questions about this topic, please do not hesitate to contact us now.