Global expatriate tax guide

Expatriate tax - China

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Expatriates taking up employment in China will be subject to comprehensive rules and employment visa requirements.

In particular, Grant Thornton China can help expatriates and their employers identify Chinese tax planning opportunities and review tax equalisation policies, and can provide compliance services in relation to Chinese tax filing requirements.

Click on each of the areas below to expand for more information:

Facts and figures
Pre arrival procedures

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.

Employment visas

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.

Tax year

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.

Tax returns and compliance

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.

Income category re-classified

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.

Income tax rates

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)

Monthly taxable income
after deductions (RMB)
IIT
(%)
QRD (RMB)
3,000 3 0
3,001 - 12,000 10 210
12,001 – 25,000 20 1,410
25,001 – 35,000 25 2,660
35,001 – 55,000 30 4,410
55,001 – 80,000 35 7,160
Over 80,000 45 15,160

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

 

Monthly taxable income
after deductions (RMB)
IIT
(%)
QRD (RMB)
2,910 3 0
2,911 – 11,010 10 210
11,011 – 21,410 20 1,410
21,411 – 28,910 25 2,660
28,911 – 42,910 30 4,410
42,911 – 59,160 35 7,160
Over 59,160 45 15,160


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

Annual taxable income
after deductions (RMB)
IIT
(%)
QRD (RMB)
36,000 3 0
36,001 – 144,000 10 2,520
144,001 – 300,000 20 16,920
300,001 – 420,000 25 31,920
420,001 – 660,000 30 52,920
660,001 – 960,000 35 85,920
Over 960,000 45 181,920

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

Annual taxable income
after deductions (RMB)
IIT
(%)
QRD (RMB)
34,920 3 0
34,921 – 132,120 10 2,520
132,121 – 256,920 20 16,920
256,921 – 346,920 25 31,920
346,921 – 514,920 30 52,920
514,921 – 709,920 35 85,920
Over 709,920 45 181,920

 

Basis of taxation
Charge to tax

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.

Residence

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

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.

Source of employment

This is less relevant in determining the IIT charge.

Benefit in kind

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.

Expatriate concessions

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

Relief for foreign taxes

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.

Deductions from taxable income

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.

Other taxes
Capital gains tax

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

Inheritance, estate, and gift taxes

There is no inheritance or gift tax in China.

Investment income

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.

Local taxes

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

Real estate tax

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.

Social security taxes

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.

Stock options

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

Wealth tax

There is no wealth tax in China.

Other specific taxes

There are no other specific taxes in China.

Tax planning opportunities

Careful planning of the employment arrangement, compensation package, benefits-in-kind, payment terms and travelling schedule may reduce IIT exposure.

These planning opportunities require proper documentation before the individual takes up employment in China and during employment. A prior review of the expatriate’s employment contract is recommended.

For further information on expatriate tax services in mainland China please contact:

David Luo
E david.luo@cn.gt.com