China Individual Income Tax Guide (1) – Determination of Resident Taxpayer and Non-resident Taxpayer

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1. The Concept of Taxpayer

Taxpayer is also called as tax main body who takes the responsibilities of paying tax. The taxpayers for individual income tax refer to the units or individuals who burden the direct tax obligations in accordance with tax law. (hereinafter referred to as the Tax Law).

In accordance with Articles 1 and 8 of the Individual Income Tax Law of the People’s Republic of China (PRC), the taxpayers of individual income tax include individuals who have domicile in China, or though without domicile, yet have resided for one year or more in China on their income derived from sources within and outside China and individuals who are neither domiciled nor resident in China, or who are not domiciled and resident for less than one year in China on their income derived from sources within China.

The taxpayers include exactly:
(a) Individual Chinese citizens and individual industrial and commercial households;
(b) Residents of Hong Kong Special Administrative Region and Macao and Taiwan compatriots and overseas Chinese;
(c) Foreign individuals.

With regard to the individual income taxation, China shall concurrently exercise the jurisdiction on the resident and on the place where the income is derived; therefore the taxpayer shall fall into resident taxpayer and nonresident taxpayer. In line with the international practices, the Tax Law stipulates that China shall exercise the taxation jurisdiction on the resident and on the place where the source of income is derived. In respect of the resident, China shall exercise the right of taxation on his worldwide income and gains; in respect of the nonresident, China shall exercise the right of taxation on his income derived within China on which the nonresident taxpayer shall be liable. In the last analysis, the incidence of taxation by China shall be determined pursuant to the principles of the domicile of origin and the domicile of dependency.

The resident taxpayer identity and tax liability shall be determined on the basis of the domicile and length of residence. Thereby, the taxpayer shall fall into the resident taxpayer and the nonresident taxpayer.

2. Resident Taxpayer and Tax Liability

An individual who is domiciled within the borders of China or who is not domiciled, but lives in China for no less than one year shall pay individual income tax on any income obtained from within or outside China in accordance with Article 1 of the Tax Law. For the purposes of Article 1 of the Tax Law, the term “lives in China for no less than one year” shall mean to have resided within the People’s Republic of 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. For the purposes of preceding paragraph, the term “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 according to Article 3 of the Regulations for the Implementation of the Individual Income Tax Law of the People’s Republic of China.

The resident taxpayer shall pay individual income tax on any income obtained from within or outside China and be liable for individual income tax boundlessly.

3. Nonresident taxpayer and tax liability

An individual who neither is domiciled nor lives within the borders of China or who is not domiciled and lives within China for less than one year shall pay individual income tax on any income obtained from within the borders of China according to Article 1 of the Tax Law. The nonresident shall pay individual income tax on any income obtained from within the borders of China and be liable for any income derived within the borders of China.

4. Standard for identifying resident taxpayer and nontaxpayer

With the aim to exercising the tax jurisdiction effectively, China introduces two standards of domicile and length of residence in respect of the identification of the resident taxpayer and the nonresident taxpayer in line with the international practices.

(1) Domicile standard

The term “domicile” refers to the concept specific to the Tax Law instead of the habitation or the living place. The term “individuals who have domicile in China” shall mean individuals who by reason of their permanent registered address, family or economic interests, habitually reside in the People’s Republic of China in accordance with Article 2 of the Regulations for the Implementation of the Individual Income Tax Law of the People’s Republic of China.

(a) Registered permanent residence: it is also called domiciliary register which is entitled to Chinese citizens. In terms of the foreign individuals who reside permanently in China and have received long-term residence permit or temporary residence permit under the control of the Chinese household register, but they shall not be deemed to have domicile within the borders of China due to the fact that they are not individuals who by reason of their permanent registered address, family or economic interests, habitually reside in the People’s Republic of China.

(b) Economic benefit: It mainly covers personal property and business transaction center etc.

(c) Habitual residence: It does not refer to the actual residence or the apartment in a particular period according to the relevant regulations of the document Guo Shui Fa [1994] 089 issued by the State Administration of Taxation. It is generally understood that, those individuals who live outside China due to study, work, visiting relatives or tour, after the end of these activities, the reasons for them to live outside China no longer exist and therefore must return to live within China, and then China is the country of the tax payer’s habitual residence.

(2) Length of residence standard

The term “have resided for one year or more in China” shall mean to have resided within the People’s Republic of 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. The term “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 in accordance with Article 3 of the Regulations for the Implementation of the Individual Income Tax Law of the People’s Republic of China.

For the purposes of Article 3 of Regulations for the Implementation of the Individual Income Tax Law of the People’s Republic of China, the term “Tax Year” shall mean the period commencing on January 1 and ending on December 31.

Hereby, when we identify individual resident taxpayer, the points that merit attention are as follows: firstly, we shall check whether the taxpayer has domicile within the borders of China. Individuals who have domicile within the borders of China shall be the resident taxpayers without consideration of the length of residence. Secondly, in terms of individuals who are not domiciled within the borders of China, their resident taxpayer shall be identified depending on the length of residence in China. Individuals who have resided within the borders of China for no less than one year in a tax year shall be the resident taxpayer, otherwise the nonresident taxpayer.

5. Tax Liability of Resident Taxpayer and Non-resident Taxpayer

Chinese resident taxpayers of China identified in compliance with the above mentioned standards shall be liable for tax on any income from within and outside China; The non-resident taxpayer of China identified in compliance with the above mentioned standards shall be liable for tax on any income from within China and pay individual income tax.

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