By Hao Wang
By Ningze Wang
wh@rayyinlawyer.com

RayYin & Partners PRC Lawyers
1502, 15th Floor, Office Tower 15 Jianwai SOHO, No.39 Dongsanhuazhonglu, Chaoyang District, Beijing, 100022 P.R.C.
Tel: 86 10 58693072
Fax: 86 10 58693073
Website: www.rayyinlawyer.com

 

After the adoption of the new Individual Income Tax Law (hereafter: IIT law or IIT) which was forth amended, we need to consider some principles and new issues when doing the tax planning. This article mainly focuses on the tax planning for expatriates in China.    

 

In general, PRC nationals are subject to tax on their worldwide income. Any individual who has resided in China less than one year will be subject to IIT only on his or her income sourced from China. An individual who has resided in China a full year or more or who is domiciled in China will be subject to IIT on his/her worldwide income. However, an exception is available for foreign nationals who have resided in China less than five years, for which only income sourced from China will be subjected to IIT in China. And any individuals who have resided in China more than five consecutive years are taxable on worldwide income commencing from the sixth year.   

 

1.Basic Concepts

An expatriate who is qualified to be a taxpayer in China should pay IIT.  There are some basic concepts:    

(1). PRC tax resident:  taxed on worldwide income   
The PRC domicile: habitually resides in China because of household registration, family ties or economic reasons) and without PRC domicile but reside in China (= 1year)   

 

(2).Non-PRC tax resident:   
Taxed on PRC sourced income

 

(3). Years of residence:
A full year of residence in China (without absence of 30 continuous days or 90 cumulative days from China)
Five years of residence. (Should be consecutive years)
Below is a form for comprehension:

Taxable individual income includes 11 items that can be sourced from the IIT Law. Such like wage & salary income, income from individually owned entrepreneurship, etc.

 

2. Employment Income
Since some items of expatriate’s employment income belongs to the taxable compensation and some items are Non-taxable compensation items under certain conditions, they should understand which items need to be calculated.

Taxable compensation items (including those paid by overseas & PRC entities)
Base salary
Bonus and other incentive programs
Pension contributions
Position allowance
Goods& service differential
Hardship allowance
Medical insurance premiums
Home leave (in excess of statutory exemption)
Other allowances

Non-taxable compensation items:
Housing
Temporary accommodation
Company car and driver
Home leave for employees only (up to 2 trips per year)
Children’s education (in China only)
Language and cultural training course for employee
Meal and Laundry
Relocation expenses

Please note there are three conditions under Tax treaty exemption:
(1) Period or aggregate periods < 183 days in a year (calendar year / fiscal year);
(2) Not paid by a PRC employer or no need for a PRC employer to pay on behalf of other entities; and
(3) Not borne by a permanent establishment or fixed base in the PRC.

 

3. Updated Issues

(1) Agreement on Avoidance of Double Taxation (DTA)
Normally in the old DTA, the 183 days rules related to employment income are counted in one year, which means, the period or aggregate periods < 183days in a year. In that case, the DTAs are applicable. But under new DTA between the Mainland of China and Hong Kong Special Administration Region and the new DTA between China and Singapore, rules have been changed, in which the period or aggregate periods < 183days shall be counted within any 12 months periods other than any fiscal year.

Thus, the expatriates who come from those two areas shall pay attention to the new 183days rules, which count the days within any 12 months.

 

(2) Stock Option (publicly list stocks)
Most of enterprises would like to use Stock option as incentives to employees. As the expatriates who work in China, sometimes, the stock option part has to be subject to the IIT in China.  If the expatriate who has been worked in China during the period between the grant day and vesting day, then when he exercise the stock option, the benefits from the stock option will be subject to the IIT combined with the days he worked in China. However, no IIT will be calculated if he works in China during the period between the vesting day and exercise day.

 

4. Compliance Requirement—IIT on Employment Income  

(1). Employer shall monthly withhold and pay on/ before the 7th day of the following month 

 

(2). Annual self-reporting by individual whose annual income >RMB120, 000 or Non-PRC domicile but one full year in China, shall report on /before 31st March of the following year.  

 

(3). The withholding agent shall be punished 50% to 300% for failure in withholding or 500% for tax evasion. And the taxpayers are liable for the IIT, late payment surcharge at 0.05% per day (18.25% per annum)  

 

(4). The New IIT administration requirement on expatriates as requested by local Tax Bureau. For instance, Guangzhou Local Tax Bureau, it requires the IIT registration and annual reporting of the arrival and departure status of the expatriates over the past year.  

 

(5). Document required for IIT registration:  

A completed register form;
A copy of passport or home visit card of the expatriate;           
A copy of the PRC and overseas employment contract and assignment letter;
A copy of offshore compensation breakdowns or salary letter; recent overseas tax returns in relation to salary income;
Other document as requested.

 

5. Tax Planning for Expatriates

(1). IIT exemption items

As mentioned before in Section 2, some items are Non-taxable, thus, it is necessary to restructure employment contract by making use of non-taxable compensation items. (Please refer to section 2)

 

(2). Proper Dual-employment Arrangement

If you think of dual-employment arrangement, you need to be aware of the following requirements: (a) the expatriate is not a Chinese domicile; (b) His employer inside and outside China much be different;(c) His employer outside China must not recharge his cost back to any entity inside China via any means including management or service fees on a permanent basis; (d) He has different sets of duties and responsibilities outside and inside China; and (e) the individual travel frequently.

 

(3). Breaking the Five Year Residency Rule

Before the end of 5years, absence from China for 30 continuous days or 90 cumulative days will reset the clock, and then the days will be recalculation again. From the sixth year, if absence from China for 30 continuous days or 90 cumulative days every year, the PRC source income is taxable other then the worldwide income. Or presence in China for less than 90 cumulative days in a year will reset the clock from the following year, which means a new five year residency begin.

 

(4). Yearly One-off Bonus (YOB)     

Lower tax rate are applicable if bonus are calculated each month other than on a yearly basis.

Expatriate are advised to speak with experienced tax lawyers for their tax planning.