On 9 February 2018, China's State Administration of Taxation (the SAT) released SAT Public Notice [2018] No. 11 (PN 11), setting out interpretations on certain tax treaty articles. PN 11 becomes effective on 1 April 2018.

The key interpretations include:

• Permanent establishment (PE)
  • The following will constitute a PE:
    • Presence of a foreign party of a non-legal entity Sino-foreign cooperative education institution; or
    • The place where the educational activities of a Sino-foreign cooperative education program are conducted.
  • Where a tax treaty provides a "6-month" threshold for determining a service PE, PN 11 clarifies that the term "6 months within any 12-month period" should be interpreted to read as "183 days within any 12-month period" when determining whether a service PE exists. This interpretation minimizes inconsistencies when calculating the six- month period by the Chinese tax authorities.
• International shipping and air transportation
  • PN 11 classifies income from voyage charter, time charter and wet lease as qualified international transportation income eligible for treaty benefits.
  • Income from a bare-boat lease, dry lease and/or container lease should not generally be considered as international transportation income unless they qualify as ancillary activities income.
• Artists and athletes
  • PN 11 provides detailed guidance on the enforcement of the artists and athletes article and clarifies the scope of activities.
  • PN 11 also provides proper applications of the article when the artists/athletes directly or indirectly derive income from China and when such income is partially or wholly paid to other individuals or companies.
• Partnership and the partners
  • For partnerships established in China, if a partner is a tax resident of the other contracting state, the foreign partner may be eligible for treaty benefits on Chinese source income from the partnership.
  • If the partnership is established outside of China:
    • The partnership may access the tax treaty if the partnership is a tax resident of the other contracting state and liable to tax in that state.
    • The partners of the foreign partnership may access the tax treaty only if:
      • The tax treaty between China and the other contracting state clearly stipulates that the partnership is transparent; and
      • The partners are tax residents and the partnership is located in the same tax jurisdiction as the partners.
    • Currently, only a few tax treaties, e.g., Articles 4e) and 4f) of the China-France tax treaty explicitly, provide the above partnership treatment.

In connection with the issuance of PN 11, the SAT also published its commentaries to further explain the interpretation by using examples.

PN 11 interpretations are generally consistent with international practice. Multinational Companies (MNCs) should review PN 11 and assess the implications on their operations in China if they are engaged in the education, international transportation and arts/sports industries. MNCs providing services to Chinese customers should also consider reviewing their PE status pursuant to PN 11.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

• Jane Hui
  jane.hui@hk.ey.com
• Becky Lai
  becky.lai@hk.ey.com

Ernst & Young Ernst & Young (China) Advisory Limited, Shanghai

• Walter Tong
  walter.tong@cn.ey.com
• Vickie Tan
  vickie.tan@cn.ey.com

Ernst & Young Ernst & Young (China) Advisory Limited, Beijing

• Henry Chan
  henry.chan@cn.ey.com
• Martin Ngai
  martin.ngai@cn.ey.com
• Andrew Choy
  andrew.choy@cn.ey.com

Ernst & Young Ernst & Young (China) Advisory Limited, Shenzhen

• Clement Yuen
  clement.yuen@cn.ey.com

Ernst & Young LLP, China Tax Desk, New York

• Min Fei
  min.fei@ey.com
• Andrea Yue
  andrea.yue1@ey.com
• Vickie Lin
  vickie.lin@ey.com
• Claire Geng
  claire.geng1@ey.com

Ernst & Young LLP, China Tax Desk, San Jose

• Diana Wu
  diana.wu@ey.com

Ernst & Young LLP, Asia Pacific Business Group, New York

• Chris Finnerty
  chris.finnerty@ey.com
• Kaz Parsch
  kazuyo.parsch@ey.com
• Bee-Khun Yap
  bee-khun.yap@ey.com

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