The State Administration of Taxation issued a notice (Guo Shui Fa [2006] No.35) on 16 March 2006 clarifying that a permanent establishment (PE) as normally contained in Art. 5(1) of the tax treaties concluded by China (People's Rep.), refers to a fixed place of business through which the business of an enterprise is wholly or partly carried on. Art. 5(4) of such tax treaties provides that a PE does not include a fixed place of business through which preparatory or auxiliary activities are carried out for the own enterprise. In line with the Commentaries to the OECD Model convention and UN Model Convention (2001), the Notice states that the terms "business" and "preparatory or auxiliary" and other PE related issues should be interpreted as follows:
| - | "business" includes not only manufacturing activities, but also the ordinary activities of non-profit organizations. As a result, activities carried out through a fixed place of a non-profit organization of a treaty partner may constitute a PE unless it is a fixed place that only carries out preparatory or auxiliary activities; |
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| - | in determining whether the activity is "preparatory or auxiliary", the following should be taken into account, i.e. whether (i) the fixed place/site merely provides services to the head office or whether it also provides services to the third party, (ii) the nature of business of the fixed place/site corresponds with that of the head office, and (iii) the business of the fixed place/site constitutes an important part of the head office's business; | |
| - | the activities of the fixed place/site cannot be regarded as preparatory or auxiliary if the fixed place/site provides services not only to the head office, but also to third parties, or, the nature of its business corresponds with that of the head office and such business activity constitutes an important part of the head office's overall business; | |
| - | income derived by an individual resident working for the PE is subject to individual income tax by reference to the Dependent Personal Service article of the applicable tax treaty and relevant domestic tax laws. As far as the personal service is provided to the government of the tax treaty partner country, the income will be exempt from tax by reference to the Government Service article of the applicable tax treaty; and | |
| - | if the taxpayer is of opinion that its site or place only conducts activities of preparatory or auxiliary nature and therefore does not constitute a PE, the taxpayer can present evidence and request the tax authority to issue a ruling of qualification. |