Individual Income Tax Liabilities for Expatriates in China

For foreigners lured into China labor market, there are many things for them to ponder over before heading to China soil. One of the critical things that need to be clearly addressed is the tax implication of working in China, namely, whether you need to pay individual income tax in China, and how and how much you need to pay China individual income tax.

For those expats who have been working in China, it has probably been a period of caution after China started strengthening its administration of taxation on foreigners in 2010. We have been approached for advice by expats who are being audited in respect of their individual income tax records by local tax authority.

We hereby summarize the basic legal framework governing expats individual income tax liabilities in respect of their salaries, wages and similar remuneration for their employment carried out in China. Individual income tax liabilities in respect of other types of income derived from property sale, royalty or other activities other than employment are not covered herein. We will at your request provide related information.

No.

Time period of stay in China by expats

Income sourced inside China

Income sourced outside China

paid or borne by domestic entity paid and borne by foreign entity paid or borne by domestic entity paid and borne by foreign entity
  1.  
Less than 90 or183 days Yes exempted No No
   2.  More than 90 or183 days but less than 1 year Yes Yes No No
   3.  More than 1 year but less than 5 years Yes Yes Yes exempted
   4.  More than 5 years Yes Yes Yes Yes
  •   “Yes” means China government will collect the individual income tax; “Exempted” means you don’t have to pay the tax though you are legally obliged to; “No” means you are not subject to such tax.
  • l “Less than” shall not include the number immediately following after it; “more than” shall include the number immediately following after it.

I      Basic Terms

Before moving to explain the table above, I would like to introduce some basic concepts that are essential to understand individual income tax implications in China.

  • Resident Taxpayer

According to China Individual Income Tax Law (the “Law”), a resident taxpayer refers to a person who is subject to Chinese individual income tax to the fullest extent by reason of his domicile within China or by reason of his stay in China for a prescribed period.

According to the Implementation Rules for the Law (the “Implementation Rules”), a foreigner may be deemed to have a domicile in China if he or she habitually resides in China by reason of household registration (hukou in Chinese), family, economic interests and etc.. But in practice, it is never clear to determine whether a foreigner should be considered a Chinese resident, even though the foreigner with their family may have bought a home and lived in China for many years.

Though without a domicile in China, a foreigner who has lived in China consecutively for more than five years (inclusive) shall be treated as a resident under the Law, provided however that he or she lives in China for a full calendar year (to be explicated later) in each of these consecutive five years.

  • China Sourced Income

Literally, China Sourced Income means that the income is derived from China or is deemed to arise in China. Pursuant to the Implementation Rules, in the case of income of salaries, wages and other similar remuneration paid for employment exercised in China, regardless of where the employment is established and where such salaries and wages are paid, inside or outside China, such income shall be deemed as China sourced income.

This is a critical point in analyzing an expat’s liability for China individual income tax, as China sourced income will be always subject to China income tax, unless clearly exempted, even though such income may be physically paid to the employee in a foreign country. On the other hand, income sourced outside China shall be taxed by Chinese authority only in certain circumstances (to be elaborated below).

This is also the case in Sino-foreign income tax treaties. For example, if you look at Article 14 (dependant personal service) and Article 22 (elimination of double taxation) in the China-USA income tax treaty, you will arrive at the same conclusion.

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For a complete read of this post, please click the following link for its PDF version.

Zhong Yin Newsletter_Expat Individual Income Tax Liability in China_20111204

Jason Tian

Jason Tian, senior partner, specializes in foreign-related legal services ranging from foreign investment in China, banking and capital, real estate, M&A, corporate, international trade, estate planning, inheritance and divorce at his blog: https://www.sinoblawg.com.

7 Comments

  1. HL   •  

    Dear Jason,
    I read all the interesting comments and others…Please kindly allow me to ask a few questions as follows:-
    1. what are the crucial points to be stipulated in the employment contract?
    2. do I understand that these income tax are payable by the employee?
    3. i still don’t understand the 90days n 183days rule what does it mean?
    4. does this tax system applies to ALL foreigners…ASEAN included?
    If you could be kind to response via my email.
    Thank you in advance!

    Cheers!
    HL

  2. AK   •  

    I read about these deduction from the IIT about the housing allowance, family visit and child education but I am confused. My company pays for the house rent and so I think I am not being taxed for it. But my company does not give any other benefits so I am paying for my own visits to home country and also my children’s education (in international school) which is quite a substantial amount. I asked the HR about it that can I give official “fa piao” for these but they do not entertain this in their calculation. Is there another way? Also if there is, then can I claim for 2011 tax refund for these if I can furnish the original monthly receipts from school? Please help. Thanks in advance.

    • Jason Tian   •     Author

      Dear AK, I think it is about your employment contract. I mean you should have asked the company to cover all your costs incurred in China by stipulating a clause in your labor contract. Otherwise, your company does not have to pay those costs unless otherwise required by your contract. Therefore, the issue in your question is about the terms and conditions of your labor contract rather than about the calculation of the individual income tax.

      Hope this explains your confusion.

      • AK   •  

        I am sorry but I do not get this. So thy should have put in the contract that I will spend xxxxx amount for my children’s educations and family visit so they do not include that in taxable income. But I thought I need to give them actual fapiao if any time this is incurred. Then what they should putin the contract. Or just nothing can be done now so I just keep paying these taxes even though I know I do qualify for rebate?

        Thanks for your help in advance.

  3. dave   •  

    One thing confusing on my end is I will be employed by China company that is legally (as a company, conducts all finances etc.) as a Hong Kong company.
    They want to pay 50% to my US bank account and 50% to a china bank account I will set up. I am assuming they want me to pay china tax on only that 50% and that I report only the other 50% put in US bank on a US income tax.
    I know that this is not what either country wants but I am told this is common.

    • Jason Tian   •     Author

      yes, it may be common but not legal.

  4. Pingback: Federal Taxes: Expatriate Individual Income Tax Implications in China | Daily Legal Law

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