Circular of State Administration of Taxation Concerning the Issue of Handling the Taxation of Enterprises with Foreign Investment and Foreign Enterprises Engaged in Consulting Businesses

GuoShuiFa [2000] No.82 May 12, 2000

In recent years, numerous accounting, auditing, consulting and law firms outside of China (hereinafter collectively cited as "Consulting Enterprises Outside of China") have entered into China to engage in businesses such as taxation, accounting, auditing, law, consultation, etc. (hereinafter referred to as "Consulting Businesses"). Some of them have established enterprises with foreign investment which are specially engaged in Consulting Businesses in China. Others have set up their agencies in China. Depending on the particularities of the businesses, some Consulting Enterprises Outside China participated in consulting activities within China; some directly sent their staff to conduct business in China, and others did so jointly with enterprises with foreign investment and agencies within China. In order to regulate the taxation administration, we now pronounce as follows with regard to the issue of handling the taxation on the income derived by the enterprises with foreign investment, agencies and consulting enterprises which are engaged in Consulting Businesses within China:

1. The issue of handling the taxation on the income of enterprises with investment and agencies within China derived from Consulting Businesses:

The income, acquired by enterprises with investment and agencies through signing contracts (including the contracts signed by agencies on behalf of its head office and the business performed actually by agencies) with clients and providing them with services in the form of Consulting Businesses, shall be fully regarded as the income of enterprises with foreign investment and agencies, and they should report and pay business tax and enterprise income tax at the places where their establishments are located.

2. The issue of handling the taxation on the income acquired by Consulting Enterprises Outside China for solely providing clients with the services of Consulting Businesses:

The income acquired by Consulting Enterprises Outside China through solely signing contract with clients and providing them with the services of Consulting Businesses, the said enterprises shall report and pay business tax and enterprise income tax with respect to the entire income, provided that all the provided service occurs within China. In case the provided service occurs within China as well as outside China, the corresponding income shall be divided into income within China and income outside China on the basis of the place where the service occurs, and they shall report and pay tax with respect to the income acquired through providing service within China. Generally, the business income that is derived from the said Consulting Businesses and is provided to clients within China shall be divided as that within China and shall be no less than 60% of the total income.

If all the consulting service provided to clients is outside China, the corresponding income will not be taxed in China.

3. The issue of handling the taxation on the income acquired by Consulting Enterprises Outside China and enterprises with foreign investment or agencies within China through jointly providing the services of Consulting Businesses to clients:

The income, acquired by Consulting Enterprises Outside China and enterprises with foreign investment or agencies within China through jointly signing the contracts with clients and providing them with Consulting Businesses together, shall be firstly divided into the respective income of the enterprises outside China and that within China according to the work load or reasonable proportions stipulated in the contracts. Enterprises with foreign investment or agencies within China shall report and pay business tax and enterprise income tax with respect to their delegated income. If Consulting Enterprises Outside China and their affiliated enterprises or agencies within China jointly provide the services of Consulting Businesses to clients in China, the proportion of income delegated as theirs shall be no less than 60% of the total income of the business.

The income, which is derived from the said Consulting Businesses in which enterprises outside China also sent staff to participate and is delegated as their income, shall be defined as their business income within China according to the place where the service occurs, and shall be no less than 50%. The said enterprises shall report and pay business tax and enterprises income tax in accordance with relevant regulations.

4. The taxable business income within China acquired by Consulting Enterprises Outside China stated in Article 1 and 2 herein, shall be incorporated into the income of their agencies and be taxed, provided that the said enterprises outside China and their agencies within China jointly provided the business. If the Consulting Enterprises Outside China have no agencies within China, or they do not jointly provide the business in spite of having agencies within China, it shall be deemed that the said enterprises have places of business within China, and the taxpayer shall withhold the tax payment.

5. In case that the above-mentioned provisions involve Consulting Businesses, which are conducted by consulting enterprises from those countries, or the Hong Kong Special Administration Region, which have signed agreements or arrangements of avoidance of double taxation with China, it shall be determined whether or not they constitute permanent organizations according to the stipulations regarding permanent organization provided in said agreements or arrangements. Those that constitute permanent organizations shall be taxed on the enterprises income according to the said circular.

6. The said circular shall come into effect as of June 1, 2000. Matters which have been handled prior to the execution of the said circular will not be adjusted again; those which have not been handled or whose relevant contracts have not expired shall be carried out according to the said circular.

Promulgated by The State Administration of Taxation on 2000-5-12