Expatriate tax ebook - China

Basis of taxation

Charge to tax
Residence
Income from employment
Source of employment
Benefits (in kind)
Expatriate concessions
Relief for foreign taxes
Deductions against income

Charge to tax
The key factors for determining whether an individual has to pay IIT in China and the scope of the liability 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 tax authorities will look at the domicile of the individual, or if not domiciled in China, the duration of the individual’s stay in the country.

The test for domicile is whether the individual usually or habitually resides in China due to household registration, family or economic involvement. Individuals who are domiciled in China are subject to IIT on their worldwide income, as are individuals who have lived continuously in China for more than 5 years.

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:

• not more than 90 days - exempt from IIT.
• more than 90 days but less than 5 years – mainland-China-source income during the period of residence in mainland China is subject to IIT.
• over 5 years - from the 6th 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 China-US double tax treaty, an individual will generally be subject to IIT only if his 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.

Benefits (in kind)
Certain fringe benefits on reimbursement basis could be exempt from IIT. These include housing, meal and laundry allowances, relocation allowance, home leave allowance, children education allowance and language education allowance. Supporting documents such as agreements, contracts or valid commercial invoices, etc should be kept for review by the tax authorities as and when required.

Expatriate concessions
In addition to the fixed monthly deduction of RMB2,000 for all employment income earners, expatriates are also entitled to an extra monthly deduction of RMB2,800.

Relief for foreign taxes
A foreign tax credit is available only where foreign-¬sourced income is also subject to IIT. Hence, this credit is generally available only to individuals who are domiciled in China, or who have lived in China for more than 5 years.

Deductions against income
There is a fixed monthly deduction of RMB2,000 for all employment income earners.


Information about China:

introduction

facts and figures

basis of taxation

what taxes?

tax planning opportunities

Last updated 6 May 2008

This information has been provided by Grant Thornton China, a member firm within Grant Thornton International Ltd and is for informational purposes only. Neither Grant Thornton China or Grant Thornton International Ltd can guarantee the accuracy, timeliness or completeness of the data contained herein. As such, you should not act on the information without first seeking professional tax advice.
Disclaimer