China Tax/Business News Flash

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May 2013, Issue 12

"Secondment" or "service" – the SAT of China gives its answer

In the last few years, many multinational groups have been facing increasing scrutiny from the Chinese tax authorities on their secondment arrangements in China. This is because secondment arrangements were often suspected to be set up to cover up the services provided by the foreign Home Entity to the Host Entity in China. This has resulted in widespread disputes. In some cases, the Home Entities were required to pay China tax to settle the disputes. Some others had to incur extra time and costs to defend their cases - many of which remain unresolved to date.

The State Administration of Taxation (SAT) recently released a long-awaited tax circular Public Notice [2013] No.19 (Public Notice 19). It provides both technical and practical guidelines for the assessment of the nature of secondment arrangements. Hopefully, it would help resolve outstanding disputes and set out a clear framework for reference of Home Entities and Host Entities as well as Chinese tax authorities. It is advisable for the Home Entities and Host Entities to revisit their existing secondment arrangements and assess how to take advantage of the latest clarifications in order to manage their secondment arrangements without unnecessary tax risk in China.

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