China Tax: Chinese State Administration of Taxation issues more guidance on interpretation of royalties under tax treaties

The Chinese State Administration of Taxation issued a circular (Circular 46) on 26 January 2010 to supplement guidance issued in September 2009 (Circular 507) on the application of the royalties article in China's tax treaties and the types of payments that will be considered royalties.

The main points of Circular 46 are as follows:

- Technical services involved in a transfer of know-how will be regarded as part of the transfer, and any income received from such services will be taxed as royalties in accordance with a relevant tax treaty.

- If the transferor constitutes a permanent establishment (PE) as a result of the provision of onshore technical services, the profits attributed to the PE may be taxed in accordance with the business profits article of the relevant treaty, and the personnel assigned to China for the services may be taxed in accordance with the dependent personal services article.

- If the transferee pays fees (including technical service fees) immediately after the relevant contracts are signed, the taxpayer can temporarily rely on the royalties article in a treaty if it is unclear whether the duration of the provision of services in China would constitute a PE. A subsequent adjustment can be made if a PE is created.

- Where services under technology transfer and service contracts signed before 1 October 2009 take place both before and after 1 October and the tax has yet not been settled, the rules under Circular 507 should be applied.