It’s important for both China-based employers and foreign employees working in China to be familiar with income tax and compliance requirements pertaining to China’s Individual Income Tax (IIT) Law. Let’s jump in and answer some basic questions in three parts.
Part I – Individual income tax of foreign employees
Q: What is the Individual Income Tax Liabilities for Foreign Employees in China?
A: The IIT liability of a foreign individual in China depends on the individual’s duration of stay in China and their source of income. The Individual Income Tax (IIT) Law of China (2011) stipulates that:
- An individual “domiciled” in the Chinese mainland is subject to individual income tax on their worldwide income.
- A non-domiciled individual staying in China for less than one year is subject to personal tax only on China-source income.
- A non-domiciled individual staying in China for one full year, but less than five consecutive full tax years, is subject to individual income tax on China-source income, plus foreign income borne by Chinese entities or establishments.
- A non-domiciled individual staying in China for more than five consecutive full tax years is taxed on worldwide income as from the sixth year for each full tax year spent in China.
Q: Under the IIT Law, what is defined as a source of income?
A: China’s IIT law defines China-sourced income as income received by the individual while working in China, regardless of whether the income is paid by an employer domestically, overseas or a sole proprietorship.
Foreign-sourced income refers to income received by an individual for working outside of China, regardless of whether the payment is made by an employer in China, overseas or a sole proprietorship.
For foreign individual paid by Chinese entities whose enterprise income tax is calculated on profits and is exempted from taxation due to zero profit, wages and salaries gained by the foreign individual for working in these Chinese entities shall be regarded as wages and salaries paid by the Chinese entities, regardless if it is unrecorded in the account books.
In addition, the following income types are deemed as China-sourced income regardless of who makes the payment:
- Income derived from one job, employed or contracted labour service performed within the territory of China;
- Income derived from leasing of property to others for use within the territory of China;
- Income derived from transfer of buildings, land use rights or other property within the territory of China;
- Income derived from granting of various franchises to be used within the territory of China; and
- Income derived from interests, dividends and extra dividends from companies, enterprises and other economic organizations or individuals within the territory of China.
Q: What is considered a tax resident under the Chinese laws and regulations?
A: There is no specific definition of tax resident for personal tax purposes in domestic law. However, the test for domicile in China is whether an individual is usually or habitually residing in China because of household registration, family or economic involvements.
An individual who has a domicile in China or who has no domicile but has stayed in China for one year or more shall pay individual income tax in accordance with IIT Law for his incomes obtained in and/or outside of China.
Q: How is the tax year calculated?
A: The tax year of China is the same as the calendar year, i.e. 1 January to 31 December, and “residing in China for one year” is defined as residing in China for 365 days in a tax year. However, a non-resident who has taken temporary absences from China for less than 30 days continuously or 90 days total in a tax year will still be considered having resided in China for 365 days of the tax year.
The duration of stay in China includes the days for public holidays, individual holidays and training days the individual enjoyed within or outside of China when working in China.
It is also worth mentioning that the day on which the individual enters or leaves China is considered a full day in determining their duration of stay in China.
On the other hand, for an individual without residence in China, who assumes positions both in a domestic entity and in an overseas entity, or only holds a position in an overseas entity, when the number of his/her working days in China is calculated pursuant to the provisions of Article 1 in the Circular of the State Administration of Taxation on Several Specific Issues Concerning the Calculation of Individual Income Tax Payable by Individuals Without a Residence Within the Territory of China (Guo Shui Han Fa [1995] No. 125), the day of his/her entries into or exits from the Chinese territory and returns or multiple returns from China, shall be calculated as half a day and shall be included in his/her actual working days in China.
Part II – Individual Income Tax Liabilities
Foreign individual income tax liability is based on the duration of residency and source of income in China. Here, it is important to note, foreign individuals working in a senior management post, General Manager, Vice General Manager, Directors of all functions and other similar management posts are subject to more specific tax liabilities.
General IIT Overview
| IIT Liability of Standard Foreign Employees | ||||
| Residency in China | Income Derived from Working in China |
Income Derived from Working Outside of China |
||
| Paid by Chinese Entities |
Paid by Foreign Entities |
Paid by Chinese Entities |
Paid by Foreign Entities |
|
| Less than 183* days | IIT | No IIT | No IIT | No IIT |
| 183 days < period of stay < 1 year | IIT | IIT | No IIT | No IIT |
| 1-year ≤period of stay ≤ 5 years | IIT | IIT | IIT | No IIT |
| More than 5 years | IIT | IIT | IIT | IIT |
| Director / Senior Management | ||||
| Residency in China | Income Derived from Working in China |
Income Derived from Working Outside of China |
||
| Paid by Chinese Entities |
Paid by Foreign Entities |
Paid by Chinese Entities |
Paid by Chinese Entities |
|
| Less than 183 days | IIT | No IIT | IIT | No IIT |
| 183 days < period of stay < 1 year | IIT | IIT | IIT | No IIT |
| 1 year ≤period of stay ≤ 5 years | IIT | IIT | IIT | No IIT |
| More than 5 years | IIT | IIT | IIT | IIT |
Q: Is a foreign Individual residing in China for no more than 90/183 in a Tax Year subject to IIT? (Note: If there is no Double Tax Agreement concluded between the foreign country of the foreign individual and China, 183 days shall be replaced by 90 days)
A: A non-resident individual who has worked in China continuously or cumulatively for no more than 90/ 183 days in a tax year is exempted from IIT on income paid by a foreign employer outside of China. This means that the individual is only subject to IIT for income he/she received from Chinese domestic institutions, entities and individuals for their work in China.
Q: Is a foreign individual residing in China for more than 90/183 but less than one-year subject IIT on foreign sourced income?
A: An individual who has resided in China for more than 90/183 days but less than one year during the tax year is subject to IIT on all China-sourced income, which includes income paid by both Chinese and overseas entities for their work in China. Income earned while working overseas (i.e. foreign-sourced income) in the tax year is not Chinese IIT taxable
Q: Is a foreign individual residing in China for more than one year consecutively but less than five years subject to IIT on income sourced outside of China?
A: A foreign individual who resides in China for more than one year, but less than five years must pay IIT for income received from both Chinese and foreign employers for work conducted in China (China-sourced income) and also income paid by Chinese employers during any temporary absences from the country.
Under these circumstances, income obtained from foreign employers for work done during a temporary absence is still not taxable in China.
Q: Are foreign individuals residing in China for more than five years consecutively subject to worldwide income tax?
A: Foreign individual who has resided in China for more than five years continuously may face IIT liabilities identical to those China-domiciled residents, depending on the duration of their residency in China starting from the sixth year. It is notable here that “five years” still refers to five tax years, i.e. 1 January to 31 December.
If a foreign individual resides in China for one year in the sixth or any following single year, he/she would be considered a resident individual under IIT and is taxable on income received globally for that specific tax year. If the individual resides in China for less than one year in the sixth or any following single year, he/she is subject to IIT on only China-sourced income, and the One-year Rule applies.
Part III – Individual Income Tax Calculations
In China, an individual’s income from wages and salaries is taxed according to a progressive rate, depending on their duration of stay in China. Non-employment income is taxed at a variable rate depending on income type.
In part III, Regional Partner Roberto Gilardino outlines the rates and calculation methods for both income sources and overviews the declaration process for individual income taxes in China.
Q: What is the tax rate on salary income?
A: Income from salaries is taxed according to a progressive rate, which is categorized into seven levels ranging from 3 to 45 percent of monthly taxable income. The relevant tax rate is shown as follows:
| China IIT Rates and Quick Deductions of Wages and Salaries | |||
| Level | Monthly Taxable Income (RMB) | Tax Rate | Quick Deduction (RMB) |
| 1 | TI ≤ 1,500 | 3% | 0 |
| 2 | 1,500 < TI ≤ 4,500 | 10% | 105 |
| 3 | 4,500 < TI ≤ 9,000 | 20% | 555 |
| 4 | 9,000 < TI ≤ 35,000 | 25% | 1,005 |
| 5 | 35,000 <TI ≤ 55,000 | 30% | 2,755 |
| 6 | 55,000 < TI ≤ 80,000 | 35% | 5,505 |
| 7 | TI > 80,000 | 45% | 13,505 |
Q: Are bonuses, allowances, and/or other income treated as taxable?
A: Specifically, wages and salaries include any kind of bonuses, allowances, and/or other income received from the employment of the individual. Certain employment benefits for foreign individuals may be treated as non-taxable under IIT law if relevant requirements are fulfilled. These include (with supporting invoices where applicable):
- The reasonable subsidies for lodging and boarding obtained by a foreign individual in non-cash form or in the form of reimbursement;
- The relocation income obtained by a foreign individual from holding a post or resigning from China in the form of reimbursement;
- Home leave fare of two trips per year for the employee, within reason;
- Reimbursement of certain meals, laundry, language training costs, and children’s education expenses in China, within reason.
Q: How is income tax calculated?
A: Monthly taxable income is calculated after a standard deduction of RMB 3,500 for local employees and RMB 4,800 for foreign individuals working in China (including residents of Hong Kong, Taiwan, and Macau). The basic formulas are as follows:
Monthly Taxable Income for Foreign Individuals = Monthly Income – RMB 4,800 – Social Insurance
Tax Payable = Taxable Income * Applicable Tax Rate – Quick Deduction
Q: Apart from wages and salaries, what other non-employment income subject to IIT?
A: Non-employment income includes:
- Income from sole proprietors and merchants’ production and business operations;
- Income from leasing of property provided to enterprises and institutions;
- Remuneration for labour services;
- Remuneration from writing;
- Income from royalties;
- Income from interests, stock dividends, and extra dividends;
- Income from the lease or transfer of property;
- Contingent and other forms of income.
Non-employment income is taxed at a rate generally ranging from 5 to 35 percent, depending on the income source.
Q: Who is liable to withhold income tax?
A: China’s individual income tax (IIT) is normally withheld from wages or salaries by employers and paid to the tax authorities on a monthly basis (within 15 days of the end of each month). Individuals receiving overseas income should file an IIT return on the overseas income with the relevant tax authority within 30 days from the end of the tax year.
In addition, an annual IIT declaration should be submitted to the relevant tax authorities within three months of the end of the previous calendar year (i.e., between 1 January 2018 and 31 March 2018 for the 2017 calendar year) for taxpayers who are subject to IIT in China and meet at least one of the following five conditions:
- Have an annual income exceeding RMB 120,000;
- Derive income from two or more places in China;
- Derive income from sources outside of China (note: this applies only to a resident or non-resident individual in China who has resided in China for more than 1 year);
- Received taxable income for which there is no withholding agent;
- Other conditions required by the State Council.
Conclusion
In general, foreigners who earn income in China and remain in China for 90 or 183 days, the individual income tax may be exempted depending on the number of working days in China, employment relationship and where the income is derived from.
However, the tax authority identifies a special remedy to avoid misunderstanding for the company or institution whose income tax is calculated based on profit and those which are exempted from taxation due to zero profit. Remunerations paid for their work within the territory of China shall be deemed as born by such Companies or Institutions within the territory of China whether it is stated in their accounting books or not. The monthly tax payable related to the abovementioned category of individuals shall be declared and paid within the period specified in the Tax Law.
If you would like more information about Individual Income Tax in China or other related corporate issues, send us an email at talktous@horizons-advisory.com, and we’ll have a Horizons professional contact you.
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