What will you be doing on 8 January 2023?

Many will head to the spa for National Bubble Bath Day, while others will be eating English toffee for National English Toffee Day.

But for the thousands of businesses with investments in China, it means the long anticipated end to China’s border closures, which commenced on 28 March 2020. On 8 January the days, weeks, and in some places, months of quarantine for inbound travelers to China will cease. The limit on the number of international passenger flights to China will be lifted and nearly all of China’s domestic COVID-19 restrictions will be curbed. 

As we near the end of the three-year hiatus on travel to China, we have compiled this alert to highlight the key things to keep top-of-mind and prepare for when business with China starts to pick up again. 

PERMANENT ESTABLISHMENT (PE) TAX RISK

• At the beginning of the COVID-19 pandemic, China issued temporary relief to the creation of PE to assist foreign business travelers who were unable to leave China due to travel restrictions. Although there is no stated end date to the relief measure, it is generally understood that the relief is relevant only when public health measures are in effect. With most of the public health measures for COVID-19 ending soon, companies that have foreign employees stranded in China (usually those who originally went to China using a business visa or Chinese nationals who originally worked outside China but returned to China during the pandemic) will need to evaluate their circumstances in light of PE tax risk if they have decided to relocate or otherwise remain in China now that they have been there for an extended period of time.

• Service PE tax risk has not been on most companies’ radar given the border closures in place for almost three years. With people starting to travel again, it is imperative to revisit the basics of service PE—the counting of days, threshold of creating service PE, ways to avoid service PE (e.g., so-called secondment arrangements or using multiple special purpose vehicles), the legal and tax consequences of service PE, and so forth.

TAX RESIDENCE OF COMPANIES

• Tax residence of a company is one of the key factors in claiming tax treaty benefits and has been a focus of the Chinese tax authority even before the COVID-19 pandemic. The COVID-19 pandemic raised concerns about a potential change in the “place of effective management” or “tax residence” of a company as a result of a relocation, or the inability of board members or other senior executives to travel. A company that has an uncertain tax residence status as a result of the COVID-19 pandemic should evaluate whether activities that require proving its tax residence need to be temporarily paused (e.g., receiving payments from China) before the tax residence issue is resolved. 

EXPATRIATE TAX BENEFITS

• Expatriates employees working in China can claim certain allowances as non-taxable items (the Expatriate Tax Benefits). The Expatriate Tax Benefits was originally set to expire on 31 December 2021, but as a result of the COVID-19 pandemic, the Expatriate Tax Benefits have been extended for another two years to 31 December, 2023. With China dropping nearly all of its domestic COVID-19 restrictions, it is expected that many expatriates will want to relocate (or return) to China. With the imminent change to the Expatriate Tax Benefits, new tax planning strategies are needed to minimize an expatriate's tax liabilities in China.

PRE-BOARDING PCR TESTING, LANDING IN CHINA, AND RETURNING TO HOME COUNTRY 

• A 48-hour pre-boarding PCR testing will still be required—it is advisable to make a testing appointment ahead of time.

• A Health Declaration (Negative PCR Testing Result) on your mobile phone is required upon landing in China—you should make sure your data roaming covers China.

• Check requirements of your home country before booking return tickets—pre-boarding PCR testing may be required by your home country for passengers travelling from China for the time being.

CHINESE VISA AND WORK/RESIDENT PERMITS

• Application procedures for Chinese visas are different from the pre-COVID-19 era. Starting in early 2021, most Chinese embassies and Chinese consulates require online applications followed by submission of hardcopies by mail or in-person after the online application is pre-approved. Processing time could take a few weeks.

• Compared to the pre-COVID-19 era, application for work and residence permits are currently subject to more substantive reviews. Requests for additional evidence and in-person interviews with immigration officers will most likely be required, even for renewals.