Expatriate tax - China

Expatriates who require a work visa (a ‘Z’ visa) must apply for this before taking up employment in China. It is therefore important that the expatriate’s employment contract and benefit package is structured efficiently for tax purposes before the contract is submitted to the immigration authorities.

Expatriates taking up employment in China must apply for an employment visa before starting work. When granting visas, the immigration authorities place a great emphasis on the education level and skills of the employee, as well as the economic benefits to China that will flow from the expatriate’s employment.

If the expatriate’s spouse and dependent family relocate to China, they will require dependent visas. Spouses entering China on dependent visas are generally not allowed to take up employment in China and must apply for a separate employment visa if they wish to work.

The tax year is the calendar year. Individual Income Tax (IIT) is assessed on a monthly basis. In addition, an annual reconciliation will be applied to certain expatriates who are tax residents of China and meet certain criteria. The annual reconciliation should be completed between 1 March and 30 June.

Expatriates should register with the Chinese tax authorities as soon as they become liable to pay IIT or if they have reason to believe that the duration of their stay in China will render them liable to pay IIT. An employer must act as a ‘tax withholding agent’ and is generally responsible for remitting tax payments to the tax authorities on behalf of the employees within fifteen days after the end of each month.

Tax penalties can be severe in China. An overdue tax surcharge is imposed on a daily basis at the rate of 0.05% of the amount of overdue tax, commencing on the first day the tax payment is in default. Depending on the reason for non-payment or underpayment of taxes, the tax authorities may impose a penalty of between 50% and 500% of the amount of tax unpaid or underpaid. In serious cases, a taxpayer may be prosecuted for criminal liability.

As the most significant change of the new individual income tax law, the income category has been re-classified. Employment income, labour remuneration, author’s income and royalty income have been classified as comprehensive income, and will be subject to a progressive tax rate ranging from 3% to 45%. In the year-end, individuals who have obtained more than two types of comprehensive income need to perform an annual reconciliation.

Non-tax resident:

1. If the individual is responsible for his/her own IIT then:
Monthly IIT = taxable income x tax rate – Quick Reckon Deduction (QRD)

2. If IIT is borne by the employer then:
Monthly IIT = (taxable income-QRD) ÷ (1 - tax rate) x tax rate – QRD 1 – tax rate

China tax resident

1. If the individual is responsible for his/her own IIT then:
Monthly IIT= cumulative taxable income x tax rate – QRD – tax already paid

2. If IIT is borne by the employer then:
Monthly IIT = (cumulative income - QRD) ÷ (1-tax rate) x tax rate – QRD – tax already paid

The key factors for determining whether and to what extent an individual has to pay IIT in China are whether the individual is domiciled in China, the period of the expatriate’s stay in China and the source of income.

The concept of residence is considered in conjunction with the concept of domicile. The following two types of individuals are considered tax residents of China.

• Individuals who habitually reside in mainland China
• Individuals who do not habitually reside in mainland China but spend more than 183 days in mainland China in a calendar year.

The test for domicile is whether the individual usually or habitually resides in China due to household registration, family or economic involvement. Tax residents of China are subject to IIT on their worldwide income.

For individuals who do not habitually reside in China but spend more than 183 days in mainland China for more than six consecutive years without a 30-day single trip outside mainland China, their worldwide income will be subject to Chinese tax.

Income from employment is subject to IIT. In general, taxable income from employment includes wages and salaries, bonuses, commissions, allowances and subsidies, taxes paid by the employer, stock options and any other income related to the individual’s position or employment.

Where a non-mainland-China domiciled individual working in the People’s Republic of China (PRC) receives wages and salaries from a foreign employer and the payment is not ultimately borne by an establishment in mainland China, his IIT exposure depends on the length of residence in the PRC in a year as follows:

• No more than 90 days – exempt from IIT
• More than 90 days but less than six years – mainland-China-source income during the period of residence in mainland China is subject to IIT
• Over six years – from the seventh year, worldwide income is subject to IIT.

In addition, bilateral tax treaties in some cases provide an additional source of rules for interpreting the term ‘residence’. For example, under the China-US double tax treaty, an individual will generally be subject to IIT only if their stay in mainland China is more than 183 days in a calendar year. Where there is a conflict between the IIT law and the term of a treaty, the treaty will prevail over the IIT law.

These rules do not apply to senior management personnel and representatives of representative offices, who are subject to IIT on income derived from, or deemed to be borne by, the Chinese establishment even if their stay in China does not exceed 90/183 days in a calendar year. Besides, there are specific rulings for more complicated cases like two sources of income and concurrent duties within and outside of China.

The interpretation of the regulations and the local practices may vary from location to location.

This is less relevant in determining the IIT charge.

Certain fringe benefits on a reimbursement basis may be exempt from IIT. These include housing, meal and laundry allowances, relocation, home leave, child’s education and language education allowances. Supporting documents such as agreements, contracts or valid commercial invoices should be kept for review by the tax authorities as and when required.

Based on the state administration of taxation’s announcement on December 2018, house rental, children’s education and language training will be replaced by additional special deduction items with a fixed deduction amount (ie children’s education, post-school education and housing rental) starting in January 2022.

Under the most updated individual income tax law, there will be no concessions for expatriates on the standard deduction.

A foreign tax credit is available where foreign sourced income is also subject to IIT. Hence, this credit is generally only available to individuals who are domiciled in China, or who have lived in China for more than six years.

There is a fixed deduction of RMB 5,000 per month for non-tax residents of China and RMB 60,000 per annum for tax residents of China for all comprehensive income earners.

Capital gains are subject to IIT as income from transfer of property.

There is no inheritance or gift tax in China.

Interest income, dividends and other investment income arising in China is subject to IIT. For individuals who are domiciled in China, or who have lived in China for more than six years, tax is paid on worldwide income.

There are no local taxes imposed on the income of individuals in China.

In addition to IIT, income from real estate transactions in mainland China may have business tax, urban real estate tax, urban land use tax, land appreciation tax, deed tax and stamp duty imposed.

The ‘China Social Insurance Law’ that took effect beginning 1 July 2011 provides that foreign workers in China shall participate in China’s social insurance filing system. The social insurance contribution is tax deductible.

Currently, the level of enforcement of the implementation varies from location to location.

Net gain on the exercise of stock options is subject to IIT as income from employment.

There is no wealth tax in China.

There are no other specific taxes in China.