2010 Articles

“Establishment”: A Core Concept in Chinese Inbound Income Taxation

Cui, Wei

A basic similarity between the Chinese approach to international income taxation and that of many other countries is the two-tiered system China uses to tax inbound foreign investments: some items of income earned by foreigners are taxed on a gross-income basis, primarily by way of withholding, while others are taxed on a net-income basis, through the filing of annual tax returns that account for both income and expenses. In the U.S., as a comparative example, whether an item of income is subject to one or the other mode of taxation turns upon whether the foreign recipient of income is engaged in a "trade or business" in the U.S. and whether the income is "effectively connected" with such U.S. trade or business. In China, a similar determination for a foreign non-individual taxpayer depends on whether the foreign entity’s income is effectively connected with an "establishment or site" ("jigouchangsuo," or "establishment" for short) in China.