China: New guidelines distinguish staff secondments and service arrangements

Global Watch ()

In the past few years, many multinational companies have been facing increasing scrutiny from the Chinese tax authorities on their secondment arrangements in China. Secondment arrangements are often challenged as an arrangement under which services are provided by an entity dispatching employees to China (so-called Home Entity) to the Chinese entity for which secondees work (so-called Host Entity). This has resulted in widespread disputes across China. In some cases, Home Entities were required to pay China tax in order to settle their disputes. Some entities had to incur extra time and costs to defend their cases - many of which remain unresolved to date. The China State Administration of Taxation recently released a long-awaited tax circular Public Notice [2013] No.19 that provides both technical and practical guidelines to assess the nature of secondment arrangements. Companies are urged to revisit their existing secondment arrangements for China assignees and assess if any precautions and safeguards are needed in view of the latest clarifications in order to manage any unnecessary disputes and exposures.