It has been a common practice for U.S. employers to send foreign employees to work for subsidiaries in China on a secondment basis. A secondment arrangement is where the employee maintains his or her employment relationship with the U.S. employer, but provides services to the Chinese subsidiary. In many locations in China, the foreign employee is able to obtain a work permit on this basis. The main advantages of a secondment arrangement over having the subsidiary hire the foreign employee is that it avoids bringing the employment relationship under Chinese law, which is very employee friendly, and it allows the employee to continue to participate in home country benefits.
However, in recent years, the Chinese tax authorities have scrutinized secondment arrangements more closely to determine if the U.S. employer has created a permanent establishment in China. If the tax authorities determine that a permanent establishment has been created, this will have Chinese tax implications for the U.S. employer.