Circular on Issues Concerning the Implementation of Relevant Articles of Tax Agreements

1. The technical service activities relating to the transfer of use rights to proprietary technology shall be deemed as part of the transferred technology, and the income derived therefrom shall be deemed to fall within the scope of royalties under a tax agreement. However, pursuant to relevant provisions of the agreement concerning a beneficial owner of royalties carrying on its business through a permanent establishment established in the country where the royalties arise and there being an actual connection between the rights on the basis of which the royalties are paid and the permanent establishment, if the technology licensor transfers personnel to the technology user to provide services in connection with the transferred technology and the duration of the service provided satisfies the criteria on permanent establishments specified in the agreement, thus constituting a permanent establishment, Article 7 on business profits of the agreement shall be implemented in respect of the part of the service revenue vesting in the permanent establishment, and relevant provisions of the article on dependent personal services of the agreement shall be implemented with respect to the personnel providing the services. Where a permanent establishment is not constituted, or with respect to service revenue that does not vest in the permanent establishment, matters shall still be handled in accordance with the provisions on royalties.

2. If a technology transferee pays the fees, including the technical service fees, upon execution of the contract, that is, it is not possible to determine in advance whether the duration of the provision of services will constitute a permanent establishment, the article on royalties may be implemented provisionally. Once it has been determined that a permanent establishment is constituted and it is determined that there is an actual connection between the relevant income and the permanent establishment then, in accordance with the relevant articles of the agreement, when levying enterprise income tax on the profit vesting in the permanent establishment and individual income tax on the relevant personnel, the treatment made based on the article on royalties shall be adjusted accordingly.

3. With respect to technology transfer and service contracts executed before October 1 2009, if the relevant service activities straddle October 1 and no tax treatment of the service income has been effected, the foregoing provisions and relevant provisions of document Guo Shui Han [2009] No.507 shall be implemented. When determining whether the technical services that straddle October 1 constitute a permanent establishment, all of the working time shall be calculated as time for the purpose of determining whether a permanent establishment is constituted; however, no adjustment shall be made to the portion of the tax imposed before October 1 on technology transfer and relevant service revenue in accordance with the article on royalties.