China Individual Income Tax Guide (2) – Determination of Tax Liability of Expatriate Employees
1. Determination of Tax Liability Depending on the Length of Residence
With respect to foreign individuals who are not domiciled but work in China, their tax liability shall be determined by the length of residence and the income earned by virtue of an office or employment within China in a tax year (year of assessment).
(1) Determination of tax liability where the length of residence is not more than 90 days or 183 days
Concerning the determination of individual tax payers with no residence within the territory of China but who, within a tax year, live continuously or for an accumulated period of no more than 90 days within the territory of China, or who live continuously or for an accumulated period of no more than 183 days within the territory of China during the period as set in the tax agreement, the wage and salary for the individuals with no residence in the territory of China but who, within a tax year, work continuously or for an accumulated period of no more than 90 days or live continuously or for an accumulated period of no more than 183 days within the territory of China, which are paid by the employers outside China and which are not borne by the organization within China of the said employers, are exempt from declaration for payment of individual income tax. The above-mentioned individuals shall declare tax payment for the wage and salary incomes gained during the period of their actual work within China, which are paid by the enterprises or individual employers or borne by the organizations within the territory of China. If these enterprises or organizations within China for which enterprise income tax is calculated and levied by the method of appraising and deciding profits or enterprise income tax is not calculated and levied for having no business income, wages and salaries gained by individuals during the period or their actual work in China who assume office in and are employed by the enterprises or organizations within China, which, whether are or are not recorded in the account books of the enterprises or organizations within China, shall all be regarded as wages and salaries paid by enterprises within China or borne by the organizations within China.
The above-mentioned individuals shall declare tax payment within the time limit set out in the Tax Law for their monthly payable tax.
(2) Determination of tax liability where the length of residence is more than 90 days or 183 days but less than one year
Individuals without residence within the territory of China but who, within the tax year, work continuously or for an accumulated period exceeding 90 days within China or who, during the period as set in the tax agreement, live continuously or for an accumulated period exceeding 183 days but less than one year within the territory of China, shall all declare payment of individual income tax on the wage and salary income gained during the period of the actual work in China paid by the enterprises or individual employers within China and by enterprises or individual employers outside China.
(3) Determination of tax liability where the length of residence is no less than one year but not more than five years
Individuals without residence within the territory of China but who have lived in China for a full year but not exceeding five years shall all declare payment of individual income tax on the wages and salaries gained by them during the period of their work in China and paid by the enterprises or individual employers within China and by enterprises or individual employers outside China. An individual who has wage and salary income gained during the period of work when he temporarily leaves China as stated in Article 3 of the Regulations for Implementation shall declare payment of tax only on the part paid by enterprises or individual employers within China. If enterprises and organizations within the territory of China which calculate and levy enterprise income tax by adopting the method of verifying profit or those which do not have business income and therefore enterprise income tax is not levied, the wage and salary gained by individuals who assume office in or are employed by the enterprises or organizations within China, no matter whether or not recorded in the account books of the enterprises or organizations within China, shall all be regarded as paid by the enterprises or organizations within China where they assume office. The above-mentioned individuals who, within one month, has both wage and salary income gained during the period of work within China and wage and salary income gained during the period when they temporarily leave China and paid by the enterprises or individual employers within China, shall have the month¡¦s payable tax calculated for both incomes and declare tax payment within the time limit as set in the Tax Law.
(4) Determination of tax liability where the length of residence is more than five years
Individuals who are not domiciled but reside for more than five years shall, commencing from the sixth year, pay individual income tax on the whole amount of income derived from sources outside China. China reserves the right to exercise the jurisdiction of taxation on resident taxpayers who are not domiciled but reside for no less than one year. In practice, we determine resident taxpayer identity and tax liability depending on whether the taxpayers reside in China for no less than five years.
In accordance with the stipulations of the document Cai Shui Zi [1995] No.98 issued by the Ministry of Finance and the State Administration of Taxation, the term ¡§Individuals are not domiciled but reside for no less than five years within the borders of China¡¨ shall mean that individuals reside for no less than cumulative total of five years, namely reside for no less than one year in every tax year of cumulative total of five years. Computation shall commence as of January 1st of 1994. Individuals who reside for no less than five years within the borders of China shall, commencing from the sixth year, pay the individual income tax on the amount of income derived from sources inside and outside China provided that individuals reside for no less than one year within the borders of China. Provided that taxpayers reside within the borders of China for less than 90 days in a certain tax year commencing from the sixth year, the tax liability of the taxpayers shall be newly determined according to the Tax Law, and the period of five year will be recounted.
Table for the determination of the taxation or exemption on the income of the individual who are not domiciled
| Tax exemption (1) Period | From within the borders of China | From outside of the borders of China | ||
| Paid by employers or borne by establishments within the borders of China (2) | Paid or borne by enterprises or establishments outside The borders of China | Paid by employers or borne by establishments within the borders of China | Paid or borne by enterprises or establishments outside The borders of China | |
| Not more than 90 days or 183 days (3) | Taxation | Exemption | No Taxation | No Taxation |
| More than 90 days or 183 days but not more than 1 year | Taxation | Taxation | No Taxation | No Taxation |
| More than one year but not more than five years (4) | Taxation | Taxation | Taxation (5) | Exemption |
| More than five years | Taxation | Taxation | Taxation (5) | Taxation (5) |
| Senior management personnel (6) | Taxation | Exemption for not more than 90 days or 183 days; otherwise taxation. | Taxation for the income paid by employers within the borders of China; otherwise exemption. | Taxation for over 5 years; otherwise exemption. |
Note:
(1) In respect to the computation of the working days, for individuals by virtue of tenure of an office in enterprises or establishments within the borders of China, the public holidays, private holidays and days for training shall be counted in working days outside and inside the borders of China; for foreign individuals who come to China on temporary trip (for example, those performing the contract of contracting project), holidays inside the borders of China shall be counted, in addition to the working days for which the labor services are rendered.
(2) Borne by the establishment: An establishment or permanent organization for which individuals provide labor services shall incur obligation to pay income. Therefore, for individuals working by virtue of the tenure of an office and employment in enterprises or establishments on which corporate income tax is levied through appraising and deciding profits inside China or which are not liable for corporate income tax due to no operating incomes, the income derived from the enterprises or establishments inside China during actual working days in China shall be deemed to be the income borne by the enterprises or establishments within China, whether the income from wage and salary is recorded in the accounting book of the enterprises or establishments in China.
(3) The term ¡§not more than 90 days¡¨ shall refer to total accumulative or cumulative days are not more than 90 days in a tax year; the term ¡§not more than183 days¡¨ shall mean total accumulative or cumulative days are not more than183 days pursuant to the Tax Agreement in a tax year (it can refer to the calendar year, any 12 months or the accounting year).
(4) The term “have resided for one year or more in China” shall mean to have resided within China for 365 days in a Tax Year. No deductions shall be made from that number of days for Temporary Trips out of the People¡¦s Republic of China. “Temporary Trips out of the People¡¦s Republic of China¡¨ shall mean absence from the People¡¦s Republic of China for not more than 30 days during a single trip, or not more than a cumulative total of 90 days over a number of trips, within the same Tax Year.
(5) The income obtained from outside the borders of China: tax credit is allowed.
(6) Senior management personnel: it involves managing director, deputy managing director, directors of all functions, director general and other posts at management level.
2. Determination of the Sources of Wage and Salary Income
The incidence of individual income taxation shall be determined on the basis of the tax jurisdiction of domicile of origin and domicile of dependency. Thereby, determination of sources of wage and salary income shall be important legal basis for determining the tax liability.
(1) Determination of the income derived inside the borders of China
In line with the stipulations of Guo Shui Fa [1994] No.148 issued by the State Administration of Taxation, the wage and salary income originates from the territory of China shall be considered the wage and salary gained by individuals during the period of actual work within China, that is: the wage and salary gained by individuals during the period of actual work within China which are paid by enterprises or individual employers whether inside or outside China, all belong to incomes originate from within the territory of China: the wage and salary gained by an individual during the period of actual work outside China, which are paid by enterprises or individual employers whether inside or outside China, all belong to incomes originate from outside China.
(2) Basic principles of determining the sources of wage and salary income
In accordance with the basic principle of Article 5 of the Regulations for the Implementation of the Individual Income Tax Law of the People¡¦s Republic of China, determination of the place of individual income tax source shall follow the principles as follows:
(1) the place where the income is derived by virtue of tenure of an office, employment and providing labor services shall be the sources of wage and salary income;
(2) the place where business and production operation is carried on shall be the sources of wage and salary income;
(3) the place where the leased property is used shall be the sources of wage and salary income;
(4) the place where properties such as houses, buildings are assigned shall be the sources of wage and salary income;
(5) the place where licensing is used shall be the sources of wage and salary income;
(6) the place where companies, enterprises and other economic organizations or individuals from which the income from interest, dividends and extra dividends is derived shall be the sources of wage and salary income.
(7) the place where lotteries or prizes are gained shall be the sources of wage and salary income.
In line with the aforesaid principles, the following income, whether the place of payment is inside China or not, shall be the income derived inside China.
(1) Income from personal services rendered inside China because of the tenure of an office and employment;
(2) Remuneration from various labor services rendered inside China;
(3) Income from business and production operations carried on inside China;
(4) Income from the lease of property to a lessee for use inside China;
(5) Income from the assignment of property such as buildings, land use rights etc. and income from the assignment of any other property inside China;
(6) Income from the licensing, nonpatent technology, trademark right, author¡¦s right for use and any kind of licensing rights inside China;
(7) Income from interest, dividends and extra dividends derived from companies, enterprises and other economic organizations or individuals inside China.
(8) Income from prize awarded by various competitions, activities organized by relevant authorities and units and wining lotteries issued by relevant authorities and units inside China.