However, at a certain point this activity may create a tax presence.
A tax presence means that the local tax authorities consider your business as local enough to tax you — even if you have no legal entity, branch, or registration. In tax treaties this is called a permanent estabishment, but the concept is broader.
If your activities create a tax presence, this can trigger obligations such as:
corporate income tax on locally attributable profits
local bookkeeping and reporting requirements
registration with tax authorities
penalties or retroactive tax assessments if risks are missed
The difficulty is that tax presence is not always obvious.
Many companies assume that “no company” automatically means “no tax”, which is not always correct.
Tax presence risks often arise when a company:
has employees or directors working from another country
uses local sales agents or representatives
carries out long-term projects or on-site activities
operates warehouses or fixed facilities
manages local operations from a home office
Whether these activities create a tax presence depends on how authorities apply these tax rules in practice.
Tax presence (permanent establishment) questions in China are handled through the national tax administration, with implementation at local level.
The competent authority is the State Taxation Administration (STA), which oversees treaty implementation and coordinates international tax administration (link).
In practice, permanent establishment issues are often determined through local tax authority audits and enforcement, using treaty concepts as implemented through Chinese administrative practice and guidance. A commonly referenced framework is reflected in practitioner material that summarises the key China treaty deviations and practical interpretation approach (link).
A useful window into how China applies permanent establishment concepts in practice is provided by two enforcement case studies described by KPMG China. The cases highlight that China’s analysis is strongly substance-based, with focus on what personnel actually do in China, how long the presence lasts, and whether the activity looks commercially core rather than auxiliary (link).
The practical takeaway from these enforcement examples is that China will often look beyond formal contracting and examine operational reality, especially where technical personnel or key executives spend time in China and create value locally.
China’s tax authority issued treaty implementation guidance during COVID that is frequently referenced in permanent establishment risk assessments. Practitioner summaries explain that the guidance is intended to clarify how treaty concepts (including fixed place and service-type exposures) should be interpreted where presence in China was driven by travel restrictions, but also illustrates how quickly risk can arise when key people are physically present and performing core work in China (link).
The key point for ongoing operations is that temporary exceptional circumstances may be treated differently than a business-designed, recurring presence. Once presence becomes structured, continuity and value creation in China become the dominant factors.
Based on treaty practice and published enforcement patterns, scrutiny in China commonly increases where foreign enterprises rely on people-based activity in China for core business outcomes. This includes technical service delivery, project execution, key management involvement, and locally performed commercial functions that are integral to revenue generation.
A practical overview of how China frames these triggers and treaty concepts is set out in guidance-oriented summaries used by practitioners, which also highlight that “service PE” concepts and time-based thresholds can be particularly relevant in China treaty practice (link).
If a permanent establishment is identified, China may impose corporate income tax on profits attributable to China activities, alongside registration, bookkeeping and documentation requirements. In practice, profit attribution discussions can become complex, especially where functions, risks and decision-making are split between China and abroad.
Because permanent establishment is often assessed after the fact, enforcement outcomes can involve retroactive assessments, particularly where operational presence in China has existed for an extended period without a clear tax position.
In China, incorporation often becomes the cleaner option once activity is intended to be continuous, where technical or operational delivery is performed in China as part of the core business, where key management spends sustained time in China, or where compliance predictability becomes commercially important. At that stage, incorporation typically provides clearer boundaries and more predictable compliance.
Across tax systems, the assessment of tax presence typically follows a consistent set of underlying principles:
Substance over legal form
Actual business activities and economic reality carry more weight than contractual labels or formal structures.
People and decision-making
Where key individuals work, negotiate, manage operations or make decisions is often decisive.
Continuity and regularity
Ongoing or recurring activities are treated differently from occasional or incidental involvement.
Economic value creation
Where value is created, managed or controlled is a central factor in tax attribution.
These principles explain why the absence of a legal entity does not automatically eliminate tax exposure.
Tax presence risk is most commonly associated with the following types of activities:
Employees or directors working structurally from another jurisdiction
Sales personnel or agents with decision-making authority
Long-term or recurring on-site projects
Fixed places of business such as offices, warehouses or workshops
Home offices used as a regular base for business operations
The decisive factor is rarely a single activity, but rather the combination, duration and functional role of these activities.
Certain activities are widely regarded as preparatory or auxiliary and typically do not, on their own, create tax presence:
Occasional business travel
Pure marketing or promotional activities
Independent agents acting in the ordinary course of their business
Short-term presence without operational continuity
Supporting functions without decision-making authority
Risk may still arise when these activities evolve or are combined with more substantive functions.