1. Case overview
Company A of a Sino foreign joint venture signed a project contract with German company Y. Company Y dispatched employees from abroad to provide technical guidance and after-sales service. After in-depth investigation by the tax authorities, it is determined that Y company is a permanent organization providing labor services in China, which should pay individual income tax in accordance with the law.
2. Event related
1) Domestic company A is mainly engaged in the design, development, manufacturing and sales of passenger cars and their parts, and provides corresponding after-sales services.
2) Company Y is the parent company of company a in Germany.
3) In recent years, the two companies have signed a number of labor contract, Y company sent its employees to a company to provide technical guidance and after-sales service for many projects.
3. Event process
The focus of the dispute between tax and enterprise lies in: Whether company Y should pay individual income tax in China when sending employees to provide services in China.
Company Y believes that each employee dispatched has been in China for less than 183 days, and the wages of the employees are paid overseas. Therefore, these employees are not required to pay individual income tax in China.
According to the view of the enterprise, the tax authorities carried out in-depth verification on the labor services provided by company Y to company A in China, focusing on the following aspects.
a) Verify the number of days the service was provided
According to the survey, company Y signed 10 contracts with company A. from 2009 to 2015, company Y sent 10 batches of more than 1000 person times to provide services for company A, mainly including technical support and R & D guidance services, and the performance time of each service contract was no more than 183 days. The competent tax authorities carefully reviewed the labor contract and the statistical table of employees' entry and exit information, and verified with company A. Each of these employees did spend less than 183 days in China each year, and even some technical employees only had a few days of entry service.
However, the tax authorities have noticed that employees of company y have stayed in China for more than 600 days from the first person to finish all the services and the last employee to leave. During the period from 2009 to 2010, employees of company Y stayed in China for 96 days and 165 days respectively to fulfill the first two contracts. If the two contracts are related, the cumulative stay time of these employees in China from 2009 to 2010 has reached 261 days, which has reached the standard of permanent organization that "continuously or accumulatively exceeds 183 days in any 12 months". In view of whether these contracts are related, the tax authorities have carried out further investigation.
b) Check whether the contract items are related
According to the "Agreement Between The Government of The People's Republic of China and The Government of The Republic of Singapore for The Avoidance of Double Taxation and The Prevention of Tax Evasion on Income" and The Interpretation of The Provisions of The Protocol (GSF [2010] No. 75, hereinafter referred to as "document 75"), several projects with business relevance or consistency conducted by the same enterprise shall be regarded as "the same project or related project".
Tax authorities should focus on the following factors to investigate whether they are relevant:
①Whether these items are included in the same master contract;
②If these projects belong to different contracts, whether these contracts are signed with the same person or associated person, and whether the implementation of the former project is a necessary condition for the implementation of the latter project;
③Whether the nature of these projects is the same;
④Are these projects implemented by the same employees.
The content of these 10 contracts is mainly to provide technical support for the cylinder block, cylinder head and crankshaft of automobile engine respectively, which seems to be independent contracts. After interview with company a, field visit and analysis of labor units, the tax authorities learned that:
First, these services are essentially to provide technical support and guidance for the same engine production line. The order of performance of the contract is consistent with the engine production process, and the process is inseparable. The contract implementation place is mainly in the engine production workshop.
Second, although these contracts are not included in the same contract, they are all signed with the same person, with strong causal connection and the same nature.
Third, due to the meticulous division of labor in Y company, although these 10 projects are not completely completed by the same batch of employees, these personnel all belong to the technical department of Y company, and there is cross dispatch of personnel during the execution of each contract.
Based on the above situation, the tax authorities consider that the 10 contract projects signed by company Y and company a meet the judgment provisions of Document No. 75 on "the same project or related project". When calculating whether the labor service activities are continuous or accumulated for more than 183 days in any 12 months, it should be determined according to the continuous or cumulative stay time of all employees in China in different periods of providing labor services for the same project. In the whole project, if y company provides labor service in China for more than 183 days in one of the "12 months" period, it should be considered as a permanent establishment in China.
After verification and communication with the person in charge of the contract project of company Y, company Y agreed with the judgment result that 10 contract projects were identified as "the same project or associated project", and it sent personnel to provide services for company a, forming a permanent organization in China.
c) Analysis and determination of China's right to levy personal income tax on employees assigned by Y company
According to the non-independent personal service clause of Sino German tax agreement and the relevant provisions of No.75 document, if German residents engage in activities as employees in China, China has the right to tax their remuneration as long as they meet one of the three conditions. The three conditions are as follows: ① staying in China continuously or accumulatively for more than 183 days in the relevant calendar year; ② the remuneration shall be paid by or on behalf of the Chinese employer; ③ the remuneration shall be borne by the employer's permanent establishment or fixed base in China.
Although the employees dispatched by company Y stayed in China for less than 183 days, and the remuneration was not paid by the Chinese employer, however, since the enterprise has a permanent establishment in China, it means that if German individuals are dispatched to the permanent organization of company Y in China, or company Y sends its employees and other personnel employed in China, the contract project of the permanent establishment or No matter how long they have worked in China and where their wages and salaries are paid, they should be considered as having been paid or borne by the permanent organization in China, and pay individual income tax in accordance with the law.
Based on the above facts, company Y has paid more than 30 million yuan of individual income tax and overdue fine in accordance with the law.
4. Case enlightenment
In recent years, with the development trend of economic globalization and the deepening of foreign economic development, the situation of non-resident enterprises sending personnel to enterprises in China to provide equipment installation, project management, technical consultation and other labor matters is increasing.
These foreigners have two characteristics: First, they are non-resident taxpayers with short entry time and stay in China for no more than 183 days. Second, the salary is generally paid by non-resident enterprises overseas.
In this case, the key to determine the right of taxation in China is whether nonresident enterprises send employees to provide services in China.
On the one hand, the tax authorities should strictly determine the permanent establishment in accordance with the law. In the specific determination, they should pay close attention to the situation of multiple contracts signed by non-resident enterprises and domestic enterprises, focusing on the investigation and analysis of whether these contract items have "commercial relevance or consistency", so as to determine whether they are essentially the same or related projects. On the other hand, we should strengthen the publicity and guidance of tax treaties to improve the tax compliance of non-resident enterprises and individuals.
Resource: “A Collection of Tax Treaty Enforcement Cases”, China Taxation Press, December 2019
