Practice to Cross-Border Training Service Fees

Training fee is one of the most common non-trading items charged by overseas enterprises. Affected by the epidemic, in recent years, more and more multinational groups have adjusted their group training from offline to online. The Value Added Tax (“VAT”) and Corporate Income Tax (“CIT”) issues arising from the changes need to be brought to the attention of the enterprises.

The common forms of online training include independent learning via training platform or software (training by machine) and live course training via remote conference system (live training), which shall be regarded as license fee and service fee to withhold VAT and CIT respectively. Furthermore, service fee for live training could be applied to CIT exemption for offshore service depending on where the service takes place.

The tax obligation of offline training is closely related to the place where the service is rendered. If expatriates are sent by overseas enterprise to China for service provision, the CIT is calculated by the deemed profit method determined by the in-charge tax authority. In the case that no permanent establishment (“PE”) is constituted, CIT exemption for PE exemption could be applied. It should be noted that overseas enterprise should separate the onshore and offshore part of the training fees and apply relevant provisions, respectively. If a breakdown of the onshore and offshore services is failed to be submitted, all the services are deemed to be rendered in China.

It should be noted that if relevant training services for the use of the technology are provided by the personnel sent by the licensor in the process of transferring or licensing the use right of know-how, the training fees shall be regarded as license fee and the full amount of income shall be subject to 10 percent withholding CIT. However, if the services rendered by the above personnel have constituted a PE, the operating profit clause in the tax treaty shall apply to the income from the service part. If the taxpayer cannot accurately calculate the operating profit attributable to the PE, the tax authority may determine it according to the principle of profit attribution regarding PE under the tax treaty.

There are two types of CIT exemption, i.e. offshore service exemption and PE exemption. The documents required by the local tax authorities under two circumstances are different. Therefore, it is recommended that enterprises shall communicate with the competent tax bureau in advance to ensure the compliance for applying tax exemption.

In addition, the overseas enterprises should note that if they dispatch expatriates to China to provide services, which constitute a PE, and the expatriates are paid directly by the overseas enterprises, all income received within and outside of China during their stay in China shall be subject to the Chinese Individual Income Tax, regardless of whether the expatriates have been in China for more than 183 days.