To unify and standardize the implementation of agreements on avoidance of double taxation (the “Tax Treaties”) entered into by the Chinese government, the State Administration of Taxation (the “SAT”) recently issued an announcement to further clarify matters relating to permanent establishments, maritime and air transportation, provisions concerning entertainers and athletes, and application of the Tax Treaties to partnerships:
I. Issues relating to permanent establishments
1. A Sino-foreign cooperative educational institution that clearly is not a legal person, and the premises where a Sino-foreign cooperative educational project engaged in educational and teaching activities, shall be considered as “permanent establishments” set up in China by residents of the other contracting state to a Tax Treaty.
2. It is specifically stipulated that “six months” and “183” days shall be understood in the same way.
II. Issues relating to maritime and air transportation
1. It is clarified that income generated from national transportation operations via ships or aircraft in the other contracting state of a Tax Treaty by an enterprise of a contracting state for is exempt from taxation in the other contracting state. It is also clarified that income generated from international transportation operation includes income generated by an enterprise operating passenger or cargo transportation businesses and from leasing aircraft (including all equipment, personnel, and supplies) by wet lease, voyage charter, and time charter.
2. Issues relating to applicable terms of maritime and air transportation for bareboat charter and dry lease are clarified.
The announcement made it clear that income generated by an enterprise from income derived from its leasing business, such as leasing boats via bareboat charter, leasing aircraft on a dry lease basis, as well as the use, storage or lease of containers used to transport cargo or goods (including trailers and equipment relating to the transportation of containers), is not considered income from international transportation. However, Article 8, Paragraph 4 of the Agreement between the Government of the People’s Republic of China and the Government of the Republic of Singapore on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income stipulates that income generated from the above leasing business that is ancillary to international transportation business shall be deemed and handled as income from international transportation. Meanwhile, the announcement provides that if the maritime and air transportation provisions do not contain the provisions of Article 8, Paragraph 4 mentioned above, income generated by residents of the other contracting state of a Tax Treaty from the above leasing business shall be handled pursuant to the above provisions.
3. The determination criteria for “ancillary” business are clarified.
The announcement specifically provides that an ancillary business for an enterprise engaging in international transportation shall be of a type that contributes a relatively small amount to the enterprise’s revenue but yet has a very close connection with the enterprise’s main business, while such business cannot be treated as stand-alone business or income source by itself.
III. Issues relating to entertainers and athletes
1. It is specifically stipulated that all other personal activities performed by an entertainer in his/her capacity as an entertainer, such as film promotion, and an entertainer or athlete’s participation in advertisement photo shoots, corporate conventions, corporate ribbon cutting, and activities of an entertainment nature which involve political, social, religious or charitable enterprises, shall all be considered activities of entertainers.
2. It is specifically stipulated that athletes engaging in competitions of an entertainment nature, as well as e-sports, shall be considered activities of athletes.
3. Rules governing the taxation on direct and indirect income of entertainers and athletes are clarified. To wit, taxes on direct income shall be collected from entertainers and athletes themselves, while taxes on indirect income shall be collected from persons receiving the income (such as performing arts agencies).
IV. Issues concerning application of the Tax Treaties to partnerships
1. It is specifically provided that for a partnership established in China pursuant to China law, if a partner is a resident of the other contracting state to a Tax Treaty, and if the other contracting state has deemed the portion of income of such a partner that is taxable in China as part of the partner’s income, such partner may enjoy favorable treatments under the Tax Treaty in China.
2. For a partnership established in accordance with the laws of a foreign country (region), if its actual managing body is not in China but has set up an establishment or site in China, or has derived income from China even though it does not have any establishment or premises in China, such managing body shall be a non-resident enterprise taxpayer subject to enterprise income taxes in China. Except as otherwise provided under the Tax Treaty, a partnership can only enjoy the favorable treatments of a Tax Treaty in China if and only if such partnership is a resident of the other contracting state.
The announcement came into effect on April 1, 2018, and Articles 8 and 17 of the Agreement between the Government of the People’s Republic of China and the Government of the Republic of Singapore on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and the Protocol Thereof (Guo Shui Fa  No. 75) were abolished at the same time. This announcement shall apply to issues encountered in the implementation of double taxation avoidance arrangements signed between mainland China and Hong Kong and Macao Special Administrative Regions.