Investing In China: Expatriate Individual Income Tax
Article by David Carnes
Expatriates on Business Trips to China
If you are sent to China by your company, your salary is paid outside of China, and you spend less than 183 days in China in a calendar year, than you must pay Chinese Individual Income Tax based on the days of the year you spend in China (note that ?China? for the purposes of this article excludes Hong Kong, Macau, and Taiwan). If you spend more than 183 days in China in any given calendar year, you will have to pay taxes on all China-source income (income related to work performed in China). This 183-day threshold is reduced to 90 for nationals of countries that have no tax treaty with China.
Foreigners Working for Chinese Enterprises in China (including joint ventures, wholly foreign owned enterprises and representative offices)
If you hold a position such as Chief Representative of a representative office or General Manager of a Chinese LLC, wholly foreign owned enterprise or Sino-foreign joint venture, your individual income tax liability begins to accrue on the minute you step off the plane in China. If you hold such a position, even if you do not visit China during the entire calendar year you will still have to file a tax return reporting zero China-source income (note that even though your salary in this case would be in exchange for China-related work, it was not performed within Chinese borders and thus is not considered China-source income).
According to the law you should declare the full salary for the position and pay individual income tax accordingly. In practice, however, it is common to see foreigners declaring an ?arranged? fixed salary for their China position (with the rest being paid off-shore) and pay taxes accordingly. This practice is illegal, and while it has been common practice in the past, it also puts the employer at risk. Fines of several million RMB have been assessed against foreign invested enterprises for tolerating such practices, and the risk of being caught is increasing.
Foreigners Holding Concurrent Posts in China and Overseas.
In this case you should arrive in China on a business visa, and you will be subject to individual income tax based on the number of days physically present in China. This is based on the total salary you are claiming from your local position and from your employer abroad. The Chinese tax bureau may want to see proof of earnings from your overseas employer (tax slips, payment vouchers, etc). At the end of each month your China employer must take copies of your passport and pay taxes based upon the number of days you were physically present in China. The tax bureau will issue a receipt, and this amount can be credited against the tax paid in your resident location (ie: you won?t have to pay tax both in China and your resident location for the time spent in China as long as your country has a tax treaty with China).
Chinese Residency and Taxation of Your Worldwide Income
If you are deemed a ?tax resident? by the Chinese government (possible if you have stayed in China for more than 5 years without residing outside the PRC for more than a total of 90 days each calendar year or 30 consecutive days within a calendar year), you will have to pay individual income tax on your worldwide income. Fortunately, taxes paid overseas can be deducted from taxes payable to the Chinese tax authorities. It is whispered that this rule is rarely if ever enforced, however.
Work Permits
Expatriates based in China must obtain a work visa, work permit, and residence card. You and your family will also have to register with the local police station. You will need to take a medical exam at a designated local hospital in order to obtain these documents (this takes a couple of hours and results are usually issued on the same day or the day following).
Tax Rates
Chinese individual income tax rates are more steeply graduated than in many nations, particularly the United States. Of course this is good news if you have a relatively low income, but for those who come to China on lucrative expatriate salaries it might mean higher taxes. Employees are required to withhold individual income tax from their employees? paychecks.
Note: Local tax bureaus apply formal and informal standards as to what constitutes a ?reasonable salary? in a given industry. Factors include position, education, and country of origin. If they believe you are underreporting your income they can unilaterally raise your declared income to the standard and tax you accordingly.
The first RMB 4,000 of salary is tax-free Total tax liability can be calculated with the following formula:
(Total Salary ? RMB 4,000 X Graduated Tax Rate) ? Standard Deductible = Individual Income Tax Liability
Up to RMB20,000 = 20%RMB20,001-40,000 = 25%RMB40,001-64,000 = 30%RMB60,001-80,000 = 35%RMB80,001-100,000 = 40%Over RMB100,000 = 45%
Note: The standard deductible has been omitted from the above. It graduates from a minimum of RMB 375 to a maximum of RMB 15,375. At the time of this writing, the exchange rate is approximately RMB8 = US.
Perks and Benefits
Many common expat perks and benefits are nontaxable.
In general, expenses that you pay yourself (in exchange for local official invoices) with cash allowances provided by your employer are taxable. Expenses that your employer pays on your behalf (housing, etc.) are generally considered non-taxable.
Fixed housing allowances, hardship allowances, and fixed expenses paid in cash are generally taxable, while provided housing at cost, free use of a vehicle, home leave allowances, educational allowances for dependents, and reimbursed expenditures are generally nontaxable as long as the amounts are considered ?reasonable?.
Penalties
Penalties for late payment, non-payment and other violations are often up to five times the amount due (plus the overdue amount). More serious penalties for employers in case of intentional, systematic or repeated violations include cancellation of business licenses and seizure of assets.
About the Author
David A. Carnes is a California attorney working for California Industrial City in Zhengzhou, China. His website, Start a Company in China, offers free, step-by-step information on establishing a business presence in China.
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