Permanent Establishment (PE) and Tax Residency Status in China During the COVID-19 Travel Ban

The travel restrictions related to the current global health crisis caused by COVID-19 have stranded many workers employed by foreign companies in China awaiting the resumption of international travel. This situation has created questions regarding tax obligations of these employees individually as well as of the foreign enterprises who employed them. Specifically, under the Double Taxation Agreements (DTA) that China has signed with other nations, does an extended stay in China affect the tax residency of an employee or the taxation obligations of the income the employee generates on behalf of a foreign business?

These concerns were partially addressed with the publication of the April 3, 2020, “OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis.” However, some aspect of the situation were not specifically addressed by this analysis, such as how to assess a Service Permanent Enterprise (PE) that may be caused by an employee residing in China for longer than 183 days, or how the Chinese government would choose to interpret the non-legally binding analysis more broadly.

Fortunately, China has clarified their interpretation of this analysis in a Q&A released November 14 by the State Taxation Administration. This article will discuss how the Chinese government has chosen to give some leeway to potential taxation issues that may arise due temporary change of residence and how parties may avoid the creation of a Service PE, especially if the COVID-19 travel restrictions continue into the foreseeable future.


Most individuals should not see their tax residency change under the circumstances of a temporary change of workplace due to travel restrictions. Virtually all individuals employed by foreign companies and currently stuck in China due to travel restrictions are Chinese and therefore are subject to Chinese income tax on worldwide income regardless of residence. Additionally, the STA has ruled that it will not count a temporary change of residence when applying a residence tie-breaker rule on a dual taxpayer. However, foreigners can still expect to be liable for Individual Income Tax on income sourced in China even if they are not tax residents of China. In many ways the COVID-19 travel restrictions should have little practical effect on any individual’s tax residency.

Fixed Place and Agency Permanent Establishment:

Although the Chinese government adheres to the OECD definition of a Fixed Place Permanent Establishment as a fixed location in which a company’s business is conducted and one that is at the disposal of the company, the Chinese State Tax Authority (STA) has not clarified what constitutes “at the disposal of.” Therefore, in normal circumstances, an employee residence could potentially constitute a Fixed Place PE if the employee is working habitually from home. However, on November 14 the STA’s Q&A clarified that temporary home-based work caused by COVID-19 is incidental and intermittent, and therefore will not be considered to put an employee’s home “at the disposal” of the foreign company. Therefore, an employee working from home will definitely not constitute a Fixed PE for as long as the STA decides to grant specially leniency due to travel restrictions.

An Agency PE is one in which an agent uses their authority to conclude contracts on the behalf of a foreign enterprise. The Chinese government has also said that occasional contract signings conducted by individuals stuck in China due to COVID-19 related to travel restrictions should not be regarded as “habitually” concluding contracts on Chinese soil, and therefore do not constitute an Agency PE. However, Chinese authorities have made very clear that this interpretation should strictly be regarded as a temporary measure. Anyone who conducted contract signings before the start of the COVID-19 Pandemic or anticipates a permanent change in location due to COVID-19 may still constitute an Agency PE.

Service PE:

Since the creation of a Service Permanent Establishment, constituted by the provision of services by a non-resident for over 183 days, is guided by the United Nations Model Tax Convention, the OECD analysis did not address this kind of PE, and the Chinese authorities have not offered the same level of clarification as for other forms of Permanent Establishment. Although it could be expected that the STA would not regard a Service PE as established under the same criteria used to assess a Fixed Place PE during the disruption caused by the COVID-19 pandemic, this absence of a declared policy leaves open the possibility that a foreign company might incur a Service PE if they have employees providing services in China for longer than 183 days in a 12-month period.

The easiest way to avoid incurring a Service PE is to limit the remaining employment of any workers currently based in China to 183 days, a number which already has far been exceeded by many employees as of December 2020. Therefore, assuming continued employment, the employer should enter into a new contract at the of the 183-day period, outlining a new scope of work and making clear that the employee’s time spent in China should not exceed 183 days during a 12-month period. This should help demonstrate that the work being done in China is “incidental” in nature and therefore does not constitute a Service PE. However, if the COVID-19 travel restrictions continue indefinitely in China, employers should consider hiring their Chinese employees through a Wholly Foreign Owned Enterprise to make sure they do not incur a Service PE in China.

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