A HK consulting firm (‘A’) sent its consultant staff to Mainland China to provide consultant services to the clients of an advisory company in Mainland China (‘B’). A charges B consultancy fee of RMB 5m. Under normal circumstances, the consultant staff would not spend more than 183 days in any calendar year on the whole firm basis. However, starting from Year 2020, A’s staff kept staying in Mainland China because of COVID-19 pandemic. A engaged CW to assess the tax exposures for H and for its staff in Mainland China.
Because of spending more than 183 days in Mainland China, A would be deemed as a Permanent Establishment (“PE”) and subject to Enterprise Income Tax (EIT). A’s staff would be subject to IIT in Mainland China too. However, A does not know what to declare tax both in Hong Kong and in Mainland China.
Whilst there are three more factors to be considered, A is considered to be a PE. B is the withholding tax agent for A’s EIT, VAT and surcharges. B needs to apply to the tax bureau in Mainland China stating that A is a PE. It then needs a tax professional to help in negotiation with the tax bureau about the deemed profit margin. In Hong Kong SAR, A still needs to report the relevant income to the Hong Kong Inland Revenue Department (“HKIRD”).
For A’s EIT paid in Mainland China, it will be allowed as tax credit against HK tax payable on that income under Double Tax Arrangement (“DTA”) between Mainland China and HK SAR, so that no HK tax would be payable in relation thereto.
If A is not considered to be a PE, the RMB 5m would be disallowed as tax deduction for B.
Whilst investors might have reliable local staff, they might not have the professional knowledge and experience to handle some non-recurring situations especially when it involves cross-border transactions and need compliance with local rules and regulations. This is especially so when the rules and regulations and preferential policies in Mainland China change frequently. Investors are therefore recommended to seek for advice from experienced international tax professionals.
This case study is for illustrative purposes and meant to provide an example of the Firm’s process and methodology. An individual case may vary based on the specific circumstances encountered. There can be no assurance that similar results can be achieved in comparable situations.
Your use of this case study, including implementing any solutions set out in the above article, does not create a professional-client relationship between you and our Firm or any of its related companies. We cannot accept you as a client unless and until we determine that there is a fit and until various requirements, such as fee arrangements, are resolved.