SAT Clarifies Partnership Treatment And PE Criteria For Tax Treaty Purposes

The State Administration of Taxation issued a Bulletin (SAT Gong Gao [2018] No.11) to clarify several practical issues in implementing bilateral tax treaty signed by China, including the treatment of partnership, the scope of Artists & Sportsman article. The new interpretation concerned also applies to tax agreement signed between China mainland and Hong Kong/ Macao. This Bulletin will come into force on April 1, 2018, with Art.8 and Art.17 under Guo Shui Fa[2010] No.75 ceasing to be effective.

Determination of PE

Educational institutions without legal personality and jointly held by Chinese and foreign parties, and physical presence of joint education programme, may constitute a PE within China for tax treaty purposes.

In addition, the threshold for determining a service PE, which provides lasting “more than six months in any consecutive 12 months, consecutively or cumulatively”, should be interpreted as lasting “more than 183 days in any consecutive 12 months, consecutively or cumulatively”.

Treatment of Partnership

As regards partnership established within China, whose partners are residents of the other contracting state, the partnership is entitled to enjoy the benefit under tax treaty in China to the extent that the income is subject to tax in China and the amount is deemed as taxable income in the other contracting state.

As regards partnership established overseas, if its place of effective management (POEM) locates outside China but it owns presence within China, or without presence in China but derives income from China, the partnership is regarded as taxpayer under Chinese enterprise income tax (EIT). In this case, the partnership may be entitled to enjoy the benefit under tax treaty if the partnership: i) is resident of the other contracting state; ii) is subject to EIT in China; iii) can prove that that the partnership is subject to tax in the other contracting state by providing the proof of residence of the other contracting state based on location, residence, place of establishment, POEM or other similar criteria, unless otherwise provided under the tax treaty.

Source: State Administration of Taxation

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