TAXATION OF PERMANENT REPRESENTATIVE OFFICES
Is a Permanent Representative Office subject to taxes in china?
A Permanent Representative Office is regarded as a permanent establishment (PE) of the head
office in China. However, having a PE in China does not necessarily
mean that the FE is subject to taxes in China. We need to examine
whether the activities being carried out by the Permanent Representatove Office are tax-exempt
or taxable in light of the prevailing tax regulations and practice
in China. The major legislations include PRC Income Tax Law for
Foreign Investment Enterprise and Foreign Enterprise, its Implementation
Regulations, the PRC Business Tax Tentative Regulations, ministerial
regulations and rules issued by the State Administration of Taxation.
See also: Business Tax, Enterprise Income Tax (EIT), Individual
Income Tax, Foreign Investment Taxation
If the Permanent Representative Office is found to be carrying on a taxable activity –
even though the Permanent Representative Office has not applied for proper business registration
– the China-source service income will be subject to Corporate
Income Tax and Turnover Tax in China. If the Permanent Representative Office only performs tax-exempt
activities on behalf of its head office, neither of these taxes
will be imposed. If the services are performed in China, the income
is usually regarded as having a source in China – regardless
of who the payer is, where the payer resides, or what the currency
Tax-Exempt v Taxable Activities
As reiterated in Circular Guoshuifa No. (1996) 165 and elaborated
in Circular Guoshuifa No. (1997) 002 issued by State Administration
of Taxation (SAT), the scope of tax-exempt activities for a RO are
Where the head office is a manufacturer, the tax-exempt activities
for its RO are:
- market study
- provision of commercial information
- liaison and other preparatory and supplementary services
rendered at nil consideration for the manufacture and sale of the
head office’s own products (i.e. the goods manufactured by
the head office) into China.
Where the head office is a trader, the tax-exempt activities for
its RO are:
- market study
- provision of commercial information
- other preparatory and supplementary services rendered at
nil consideration for sale of the head office’s own goods
Circular Guoshuifa No. (1997) 002 defines ‘sale of own goods’
as the trading activities that the head office has purchased, received
and stored (the goods) before sale. The Permanent Representative Office should be able to prove,
to the satisfaction of the tax bureau in charge, that its head office
has autonomy and control over the pricing of the goods. In addition,
the RO should be able to prove that its head office bears the business
risks (e.g. inventory risks and risks of bad debts) that are normally
expected for a trader of goods. For example, the tax bureau in China
will not regard the following activities of the head office as ‘sale
of own goods’ if:
- head office has firstly solicited and concluded a sale
before it places the related purchase orders or production orders
with suppliers (e.g. indent sale, back-to-back sale)
- the goods are purchased from the supplier and resold into
China by head office at prices determined by the supplier.
In such instances the tax bureau will consider the head office as
an agent for the suppliers / customers rather than a trader for
tax purposes in China. As a result, the marketing and liaison activities
carried out in China by the Permanent Representative Office will be considered taxable as agency
services rendered to the head office’s suppliers / customers
rather than to the head office.
Where a FE does not separately charge a service fee or commission
fee, for example, from its supplier / customer, the tax bureau could
consider that the ‘service income’ was taken into account
and implicitly reflected in the prices of the goods purchased by
the FE from its supplier or sold to its customer.
Where the head office is a financial institution, the tax-exempt
activities for its Permanent Representative Office are:
(1) providing preparatory or auxiliary services to customers
in China at nil consideration
(2) those connected with money lending between head office
and its customers.
Where the head office is a government body or non-profit-making
organisation the activities carried out by the Permanent Representative Office are tax-exempt.
They are subject to the adjudication by the tax bureau in charge
and the SATs final approval.
If the Permanent Representative Office believes that its activities could qualify for tax exemption
they should apply to the tax bureau in charge for their adjudication
If the activities of a Permanent Representative Office go beyond the tax-exempt activities mentioned
above, the FE will be subject to Corporate Income Tax and Turnover
Tax in respect of the income (e.g. commissions, rebates, handling
fee income, service fees) derived from the activities performed
in China by the Permanent Representative Office. This will be calculated on an actual or deemed
basis. Listed below are examples of taxable activities of a RO (as
detailed in Circular Guoshuifa No. (1996) 165):
(1) trade agency services performed by a Permanent Representative Office of a trading company
(2) all kinds of services provided by a Permanent Representative Office of a consulting
company engaged in professional services (e.g. business, legal,
tax or accounting consultation)
(3) all kinds of services rendered by a Permanent Representative Office of an investment
holding company to its group companies
(4) advertising agency services carried out by a Permanent Representative Office of an advertising
(5) all kinds of services (e.g. visa application, fee collection,
air ticket booking, tourist guiding, arranging accommodation) performed
by a RO of a travel agency company
(6) investment or other consultation services provided by a
RO of a financial institution
(7) any level of transportation services rendered by a RO of
a transportation company to customers
(8) any other taxable activities provided by a Permanent Representative Office.
If a Permanent Representative Office carries on any taxable activities in China, the income
attributable to the taxable services performed in China will be
subject to Enterprise Income Tax (EIT) and Business Tax (BT). EIT
is imposed on the assessable profits. The prevailing tax rate is
33% (including 3% local income tax). This is reduced to 15% –
generally the 3% local income tax waived – if the Permanent Representative Office is registered
and operates in one of the five Special Economic Zones in China
(Hainan, Shantou, Shenzhen, Xiamen and Zuhai). In addition, BT is
levied at 5% on the taxable revenue.
In general, a quarterly EIT return should be prepared. This should
be based on the unaudited management / expenditure account of each
quarter, and be filed within 15 days. Within four months after the
end of a tax year (i.e. calendar year), an annual EIT return –
supported by the audited financial statements or expenditure accounts
for the year – should be filed for the reconciliation and
finalisation of the tax liabilities for the year.
For BT, strictly speaking, a monthly return should be filed within
10 days of the end of each month. In practice, many tax bureaus
allow the filing of BT returns of a RO on a quarterly basis. However,
the taxpayer should check the prevailing local practice. In addition,
tax bureaus in some locations also require the filing of the annual
BT return for each year.
The Detailed Rules for Implementation of the Tax Collection and
Administration Law of China states: ‘when a taxpayer has been
approved for tax exemption, the tax returns prepared on a nil taxable
income basis should still be filed with the tax bureau in a timely
In addition to EIT and BT, the management of a Permanent Representative Office should also pay
- the import Customs Duty and import taxes (i.e. Value Added
Tax and Consumption Tax) on the importation of commodities into
- Stamp Duty payable on the taxable documents in China
- the Individual Income Tax withholding and filing requirements
in respect of the individuals working for the Permanent Representative Office.
Taxable Amounts – Actual Basis v Deemed Basis
If a Permanent Representative Office maintains the accounting books and business records (e.g.
service agreements, vouchers and receipts) in China, these can be
audited by a registered CPA firm to reasonably ascertain the income
and profit amounts. The Permanent Representative Office may apply to the tax bureau to file the
tax returns on the actual results basis.
In practice, many Permanent Representative Offices do not maintain a full set of accounting records
in China. In addition, many FEs do not enter into separate contracts
or charge a separate service fee for the work done by their Permanent Representative Offices
in China for the FE’s suppliers or customers. In such situations,
the tax bureau prescribes the use of one of the following methods
to estimate their taxable revenue and assessable profits for filing
tax on a deemed results basis. Once the method is approved, it should
be consistently applied.
This method is only useful if the revenue information is available
and can be proved to the satisfaction of the tax bureau. It involves
1. ascertaining the China-source revenue attributable to the work
done by the RO
2. deeming the profits in the absence of expense details.
Ascertaining the China-source revenue for the RO
If a Permanent Representative Office can provide documentary evidence (e.g. service contracts
or sales contracts specifying the commission amounts) showing the
accurate amount of the China-source revenue, the tax bureau will
allow the use of that amount as taxable revenue.
However, if the total amount of China-source revenue for the RO
is not explicitly available – but the Permanent Representative Office can submit all the
relevant sales contracts between its head office and the customers
in China for the goods sold into China – the tax bureau may
deem 3% of the total sales amount as the revenue for the RO.
If the Permanent Representative Office can provide further documentary evidence substantiating
the part of the sales agency services that are carried outside China
by its head office, the tax bureau may approve to treat only 50%
of the revenue as the taxable revenue for the Permanent Representative Office. After the determination
of the taxable revenue, BT should be paid at 5%.
If there is no proof of the actual amount of expenses of the Permanent Representative Office,
the tax bureau will generally estimate the taxable profit for the
Permanent Representative Office by applying a deemed profit rate on the taxable revenue amount.
The deemed profit rate for provision of liaison and promotional
services in China is currently 10%.
A Permanent Representative Office in Beijing provides liaison and marketing services in China
for the sale of goods into China by a company in Hong Kong (HKCo)
for HK$934,580 (converted to RMB1 million). HKCo is a fellow subsidiary
company of the head office of the Permanent Representative Office.
The tax bureau reviews the service agreement and agrees that the
taxable revenue is RMB1 million. However, the RO is not able to
provide any invoices for the expenses incurred in relation to the
Accordingly, the EIT and BT payable by the RO will be as follows:
Taxable revenue = RMB1 million
BT payable = RMB1 million x 5%
Taxable profit = RMB1 million x 10%
EIT payable = RMB100,000 x 33%
Effective tax rate = 100% x (33,000 + 50,000) / 1,000,000
= 8.3% (of taxable revenue).
If the RO is registered and operates within a Special Economic Zone,
the EIT and BT payable by the RO will be as follows:
BT payable = RMB50,000
EIT payable = RMB100,000 x 15%
Effective tax rate = 100% x (50,000 + 15,000) / 1,000,000
= 6.5% (of taxable revenue).
A Permanent Representative Office in Shanghai carries out taxable activities in China. The total
sale of goods that its head office sold into China in connection
with the liaison and marketing effort of its Permanent Representative Office is US$200,000 (US$1
= RMB8.3). The sales contract did not state the commission income
amount for the head office and its Permanent Representative Office. The RO could not provide
any supporting evidence for its expenses, but could provide documentary
evidence to substantiate that about half of the liaison and marketing
work in respect of the total sales in China was done outside China
by its head office.
The EIT and BT payable by the Permanent Representative Office will be as follows:
Deemed commission income = US$200,000 x 8.3 x 3% = RMB49,800
China-source revenue = RMB49,800 x 50% = RMB24,900
BT payable = RMB24,900 x 5%
Taxable profit = RMB24,500 x 10%
EIT payable = RMB2,490 x 33%
Effective tax rate = 100% x (1,245 + 822) / 24,900
= 8.3% (of taxable revenue).
The revenue-based method is not commonly used. This is due to the
administrative burden and considerations of business information
sensitivity in submitting the original sales contracts to the tax
bureau for examination.
This is currently the method preferred by tax bureaus. It is used
for almost all ROs set up after the implementation of Circular Guoshuifa
No.(1996) 165. Tax bureaus require taxpayers to adopt this cost-plus
methodology in the following situations:
(1) where the Permanent Representative Office is unable to present valid documentation or
proof to accurately distinguish its taxable and tax-exempt activities
(2) where the Permanent Representative Office often provides services to customers together
with its head office, and is unable to present valid documentation
or proof to substantiate the respective share of the revenue of
head office and its Permanent Representative Office
(3) circumstances in which the Permanent Representative Office fails to report its taxable
amounts properly and accurately.
This method involves three steps:
1. ascertaining the total expenses of the Permanent Representative Office
2. deeming the taxable revenue in the absence of the revenue information
3. estimating the assessable profit based on the taxable revenue
Ascertaining the total expenses
The ‘total expenses’ of a Permanent Representative Office normally include:
- the remuneration paid to Permanent Representative Office staff (irrespective of the
- telecommunication expenses
- travelling expenses
- rental expenses
- entertainment expenses
- costs and freight charges for purchases of sample goods
in China for its head office.
The full amount should be included in the total expenses in the
tax reporting period when expenditure is incurred for additions
to fixed assets and leasehold improvements. If the lump sum included
in the total expenses during one tax reporting period is large –
causing hardship – the taxpayer can apply to use the depreciation
and amortisation charges for each period in calculating the total
expenses for that period. In this instance the tax bureau must be
satisfied that proper and complete accounting books and records
Office equipment, vehicles, furniture and fixtures should be depreciated
over five years. Buildings should be depreciated over twenty years.
The straight-line method should be used for depreciation calculations.
No residual value is required on these fixed assets. Leasehold improvement
expenditure can be spread evenly over a maximum of five years.
Certain items cannot be included in the calculation of the ‘total
expenses’ of a Permanent Representative Office. These include:
(1) tax late-payment surcharges and penalties
(2) qualifying charitable cash donations for China
(3) expenses paid on behalf of the head office (not directly
related to the RO’s own activities), for example:
– airline expenses for staff visiting the head office
– hospitality, accommodation and transportation costs and
entertainment expenses incurred by delegates from head office visiting
China (not directly related to any discussion or conclusion of any
– rental expenses for meeting venues used by head office to
hold conferences (not directly related to any discussion or conclusion
of any business contracts)
– advertising and exhibition expenses, customs duty and import
taxes on imported samples of goods and local delivery expenses (in
relation to large exhibitions held in China by the head office)
– compensation payments made to customers of head office,
in relation to the head office’s non-compliance of the contract
terms of its goods sold in China.
Interest income of the Permanent Representative Office cannot be used to set off expenses of
the RO. You should also note that expenditure accounts audited
by a registered CPA in China are required to be submitted to the
tax bureau on an annual basis in support of tax filings using this
The following gross-up formula is prescribed by the tax bureau to
estimate the taxable revenue from the costs of the Permanent Representative Office:
Taxable revenue =
Total expenses of the RO
(1 - BT - Deemed profit rate)
This may be an easier way to understand the rationale behind estimating
tax revenue. BT should also be regarded as part of the expenses
of a Permanent Representative Office. A business is expected to make a profit. The tax bureau
believes that a RO is expected to earn:
Estimated taxable revenue (R)
= (Total expenses + BT) + Deemed profit margin
= Total expenses + R x 5% + R x 10%
= Total expenses / (1 - 5% - 10%)
= Total expenses / 0.85
Accordingly, the revenue is about 117% of the total expenses (not
including BT). The mark-up rate is 10% of the taxable revenue but
is indeed more than 17% of the total expenses. A cost mark-up rate of 17% for ‘low-value’ liaison and marketing services
is at the high end in international business practice.
Estimated assessable profit
= Estimated taxable revenue x Deemed profit rate (currently at 10%)
Since ‘total expenses’ of a Permanent Representative Office is used in the above
estimation, the taxable revenue for the Permanent Representative Office could be overestimated
if part of the RO’s expenses is attributable to the tax-exempt
activities of the Permanent Representative Office. If such a case does happen, representatives
from the RO may wish to discuss with the tax bureau in charge to
ensure the Permanent Representative Office is fairly treated.