Why is the significance of permanent establishment in DTAs?

Permanent establishment (PE) – defined as a fixed place at which the business of an enterprise is carried out in a given country. If a non-resident enterprise (in terms of China) is a tax resident of a jurisdiction that has a DTA in place with China, it may be able to claim exemption from CIT if its establishment or venue in China does not constitute a “PE” pursuant to the “PE” article under the relevant DTA. However, where a resident of a country which has a DTA with China carries on business in China through a PE, the profits derived by the PE will be subject to taxes in China. Simply put, foreign companies can be deemed to have a PE in China, if:

• It has an establishment or a place of business in China (Fixed place PE);

• It has a building site, a construction, assembly or installation project or related supervisory activities that last for a certain period of time

(Construction PE);

• It appoints an agent in China to conclude contracts or accept orders in China (Agent PE);

• It has employees working in China for a certain period of time (Service PE).