Announcement on Several Issues Concerning the Implementation of Tax Agreements

(Issued by the State Administration of Taxation as on February 9, 2018 and effective as of April 1, 2018.)

SAT Announcement [2018] No.11

With a view to making uniform, and regulating, the implementation of agreements for the avoidance of double taxation (Tax Agreements) executed by the government of China with foreign countries, we hereby notify you on matters relevant to provisions concerning permanent establishments, shipping and air transport, and artistes and sportsmen in such Tax Agreements and the application of such Tax Agreements to partnerships as follows:

1 .  Sino-foreign cooperative educational institutions without legal personality and venues in Sino-foreign cooperative educational projects that carry out educational and teaching activities constitute permanent establishments in China of tax residents of the other contracting state to a Tax Agreement.

Where the language concerning service activities constituting a permanent establishment in the provisions on permanent establishments reading “more than six months in succession or in the aggregate in any 12 month period” shall be handled as language reading “more than 183 days in succession or in the aggregate in any 12 month period”.

2 .  Where provisions on shipping and air transport are consistent with the Agreement Between the Government of the People's Republic of China and the Government of the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Article 8 (Shipping and Air Transport) of the Protocol thereto (the Sino-Singaporean Tax Agreement), matters shall be handled in accordance with the following principles:

(1)        Where an enterprise of a contracting state derives revenue from the other contracting state from the operation of ships or aircraft in international traffic, such revenue shall be exempt from tax in the other contracting state.

Revenue from international traffic means revenue derived by an enterprise from the carriage of passengers or cargo by ship or aircraft as well as rental revenue derived from the voyage charter or time charter of ships or the wet rental of aircraft (including all equipment, personnel and supplies).

(2)        The tax exemption provisions of Item (1) above shall also apply to revenue derived from participation in partnership operations, joint operations and the participation in firms that operate internationally. With respect to the tax treatment of the joint operation of international traffic by multiple companies, each enterprise with an equity stake or each cooperating enterprise shall pay tax in the country of which it is a tax resident on its share of the profit.

(3)        “The interest revenue derived by an enterprise of a contracting state from its deposits of moneys incidental to and connected with its operations of ships or aircraft in international traffic” in the third paragraph of Article 8 of the Sino-Singaporean Tax Agreement, means, where the parties of the contracting states are shipping or air transport enterprises that engage in international traffic, the interest generated on transport revenue that is derived from and deposited with the other contracting state. Article 11 (Interest) of the Sino-Singaporean Tax Agreement does not apply to such interest, but shall be deemed revenue incidental to international traffic and exempted from tax in the source state.

(4)        Revenue derived by an enterprise from rental business such as the bare boat charter of ships or the dry rental of aircraft or the use, maintenance or rental of containers for the transport of goods or merchandise (including trailers and equipment for the transport of containers) is not revenue derived from international traffic, however, pursuant to the fourth paragraph of Article 8 of the Sino-Singaporean Tax Agreement, that aforementioned rental revenue incidental to international traffic shall be treated as revenue from international traffic.

The term “incidental” means related to and serving international traffic, being of a supporting and accompanying nature. To be eligible for the benefits under the shipping and air transport provisions of an agreement in respect of its revenue derived from the aforementioned rental business incidental to international traffic, an enterprise shall satisfy the following three conditions:

(i)         its business registration and relevant documentation are able to substantiate that its main business is international traffic;

(ii)        the incidental business engaged in by it is an activity that, when it is operating international traffic, makes a relatively minor contribution to the main business it engages in but is intimately connected to such business and cannot serve as a standalone business or source of income; and

(iii)       the revenue it derives from such incidental business in one fiscal year does not, in principle, exceed 10% of the total revenue from its international traffic.

(5)        The following revenue intimately related to international traffic shall be treated as a part of revenue derived from international traffic:

(i)         revenue derived from the sale of passenger tickets on behalf of another international traffic enterprise;

(ii)        revenue derived from taking passengers from the city center to an airport;

(iii)       revenue derived from transport from warehouse to airport or pier or from the latter to the purchaser of the goods by truck as well as that derived from the delivery of goods directly to the purchaser thereof; and

(iv)       revenue derived by an enterprise from the hotel established by it to provide transit accommodation to the travelers it carries.

(6)        The revenue derived from the engagement in international traffic using the ships or aircraft owned by an enterprise that does not specialize in the operation of international traffic is deemed revenue derived from international traffic.

3 . If the shipping and air transport provisions do not contain the provisions of the fourth paragraph of Article 8 of the Sino-Singaporean Tax Agreement, the treatment of the revenue derived from the rental business described in Item (4) of Article 2 hereof by a tax resident of the other contracting state to the relevant Tax Agreement shall be handled with reference to Item (4) of Article 2 hereof.

4 . Where the provisions on artistes and sportsmen are consistent with Article 17 (Artistes and Sportsmen) of the Sino-Singaporean Tax Agreement, matters shall be handled in accordance with the following principles:

(1)        The activities of artistes include the various artistic activities, such as in theater, film, television and music, engaged in by an artiste; other personal activities engaged in as an artiste (e.g. film publicity activities engaged in by an artiste, and the participation in the filming of commercials, corporate annual meetings, corporate ribbon cuttings, etc. by artistes and sportsmen); and political, social, religious or charitable activities of an entertainment nature.

Activities of artistes do not include speeches given at meetings or activities engaged in as an accompanying administrative or back office person (e.g. photographer, film producer, director, choreographer, technician or transport personnel for a traveling performance troupe, etc.).

Speeches of a performance nature given in the course of business activities are not deemed speeches given at meetings.

(2)        Activities of sportsmen include participation in activities in traditional sports disciplines, such as foot races, high jumping and swimming; participation in sports activities, such as golf, horse racing, soccer, cricket, tennis and car racing; and participation in competitive activities of an amusement nature, such as billiards, Chinese chess, bridge and electronic sports.

(3)        The income derived from personal activities conducted as an artiste or sportsman includes income derived from performance activities (e.g. appearance fees) as well as income directly or indirectly linked to performance activities (e.g. sponsorship fees).

Income apportioned to artistes or sportsmen from the income generated from the sale of audio or video recordings of performance activities as well as copyright related income relating to artistes or sportsmen shall be treated in accordance with Article 12 (Royalties) of the Sino-Singaporean Tax Agreement.

(4)        Where an artiste or sportsman directly or indirectly derives income, the contracting state where the performance activity occurred may, pursuant to the first paragraph of Article 17 of the Sino-Singaporean Tax Agreement, levy tax on the income derived therefrom by the artiste or sportsman in accordance with its domestic laws without being subject to Article 14 (Independent Personal Services) or Article 15 (Dependent Personal Services) of the Sino-Singaporean Tax Agreement.

(5)        Where all or part of the income generated by performance activities is received by a third party (an individual, company or other organization), if, pursuant to the domestic laws of the contracting state in which the performance activities occurred, the income received by the third party ought to be deemed as having been derived by the artiste or sportsman, then, pursuant to the first paragraph of Article 17 of the Sino-Singaporean Tax Agreement, the contracting state where the performance activities occurred may, pursuant to its domestic laws, levy tax on the artiste or sportsman in respect of the income generated from the performance activities, without being subject to Article 14 (Independent Personal Services) or Article 15 (Dependent Personal Services) of the Sino-Singaporean Tax Agreement; if the contracting state in which the performance activities occurred cannot, pursuant to its domestic laws, deem the income received by the third party as income derived by the artiste or sportsman, then, pursuant to the second paragraph of Article 17 of the Sino-Singaporean Tax Agreement, it may, pursuant to its domestic laws, levy tax on the third party that received the income in respect of the income generated by the performance activities without being subject to Article 7 (Business Profits), Article 14 (Independent Personal Services) or Article 15 (Dependent Personal Services) of the Sino-Singaporean Tax Agreement.

5 . With respect to the issue of the application of Tax Agreements to partnerships and other similar entities (Partnerships), matters shall be handled in accordance with the following principles:

(1)        If a partner in a Partnership established in China in accordance with Chinese laws is a tax resident of the other contracting state to the Tax Agreement, the portion of income on which such partner bears a Chinese tax payment obligation that is deemed by the other contracting state as its tax resident's income shall be eligible in China for the benefits available under such agreement.

(2)        If the actual management organization of a Partnership established in accordance with the law of a foreign country (region) is not located in China, but it has an establishment in China, or, although it does not have an establishment in China, it has income sourced in China, it is a non-tax-resident enterprise payer of Chinese enterprise income tax. Unless otherwise provided in the Tax Agreement, the income on which the Partnership bears a tax payment obligation in China is eligible for treatment under such agreement only if such Partnership is a tax resident of the other contracting state. The tax-resident identity certificate issued by the competent tax authority of the other contracting state submitted by the Partnership pursuant to Article 7 of the Measures for the Administration of the Eligibility of Non-tax-resident Taxpayers for Tax Agreement Benefits (SAT Announcement No.60 of 2015) shall be capable of showing that, pursuant to the domestic law of the other contracting state, the Partnership bears an obligation of paying taxes in the other contracting state due to domicile, residence, place of establishment, location of management organization or other similar criterion.

A Tax Agreement providing otherwise means that, if the Tax Agreement specifies that, when, pursuant to the domestic law of the other contracting state, the income derived by a Partnership is deemed income derived by the partners, the partners that are tax residents of the other contracting state are eligible for the benefits under the agreement in respect of their respective shares distributed to them from the income derived by the Partnership.

6 . This Announcement shall apply to issues relevant to the implementation of the arrangements for the avoidance of double taxation executed by mainland China with Hong Kong and Macao Special Administrative Regions.

7 . This Announcement shall be effective as of April 1, 2018. Articles 8 and 17 of the Interpretation of the Terms of the and the Protocols thereto (Guo Shui Fa [2010] No.75) shall be repealed simultaneously.