Seconded UK employees as a permanent establishment in China

Under the China-UK double tax agreement, UK firms deriving profits in China are protected from Chinese tax liability on the profits unless the profits are derived through a permanent establishment. Unlike the original 1984 treaty between China and the UK, the current treaty, effective from 1 January 2014, deems a UK company to have a permanent establishment in China in some circumstances where its employees provide services in China, including services provided to its subsidiaries, for more than 183 days in a 12 month period. Where this happens, the profits of the deemed permanent establishment will be subject to Chinese company income tax. The profits will normally be calculated as a percentage of the service fee paid to the UK employer for the services provided by its employees. This article explores the circumstances in which a UK employer can find itself with a deemed permanent establishment in China when seconding its employees to work in its Chinese subsidiaries and, when this happens, how its tax liability may be calculated.