Several Issues related to Individual Income Taxes for Expatriates in China

Expatriates on extended business trips to China

If you are sent by your organization to China and your salary is paid off-shore (probably in your home country) and you spend more than 183 days in China in a calendar year, than you have to pay IIT in China based on the days you effectively spend in the country. This means that if you spend in China, let’s say, 184 days within a calendar year, than you would have to pay taxes on all income sourced from China (meaning income related to your work performed in China).

Foreigners working for legal enterprises in China

Without going into too many complicated calculations and theories, if you hold positions such as the Chief Representative (CR) of a Representative Office (RO) or the General Manager of a Chinese Limited Company, Wholly Foreign Owned Enterprise or a Joint Venture anywhere in China, then you are subject to IIT from the first day you commence work in the country.

Interestingly, should you not actually visit China within a calendar year but are still acting as the Chief Representative of a Representative Office, then zero tax filings should still be made monthly to the local authorities.

According to the law you should declare the full salary for the position and pay IIT accordingly. In practice, however, it is common to see foreigners declaring an “arranged” fixed salary for their China position (with the rest being paid offshore) and pay taxes, accordingly, lowering to a great extent their full tax liability. This practice is illegal so be careful should you decide to pursue this route. While this has been common practice in the past, it also puts the employer out of compliance – fines of several million RMB have been levied just recently to FIE’s engaged in such practices in China – and the risk of being caught – with the issue now highlighted at audit – is increasing.

Foreigners holding concurrent posts both in China and elsewhere

Firstly, you should be arriving in China on a business visa and are subject to IIT based on the number of physical days you are in China. This is assessed upon the total salary you are claiming from your local employment position and from the parent company overseas – the Chinese tax bureau may want to see proof of earnings from your parent (tax slip, payment voucher etc.) to support your case. At the end of each month, your China office should take copies of your passport, together with the entry/exit stamps for that month, and file and pay for taxes based upon the number of days spent in the PRC. The tax bureau will issue a receipt showing this has been paid, this can be credited against the tax paid in your resident location (i.e.: you won’t have to pay tax both in China and your resident location for the time spent in China).

China residency status and IIT on your worldwide income

Be aware that if you are regarded as tax resident by the Chinese government, which means you have stayed in China for more than 5 years (without residing outside the PRC for more than 90 days cumulatively each calendar year or 30 consecutive days always within a calendar year), you have to pay IIT on your worldwide income without limitation of source. This means that shall you have income elsewhere related to property rentals or interests; these shall also be declared to the Chinese tax authorities. The taxes paid overseas can be deducted from the taxes payable to the Chinese tax authorities. To be fair, we did ask the State Administration of Tax if they had ever collected such revenues, and the honest (and slightly bashful) answer was “No” – however why expose yourself to such a law without reason. It’s easy to avoid so count those days and give yourself a month out of China every 5 years.

Work Permits Registration Procedures

If you are based in China and working here, then you should apply for working visa, working permit and residence card.

Please be aware that constant checks in residential areas are conducted by the local Public Security Bureau and one of the first things you should do when you arrive and rent an apartment in the country is to get registered with the local Pai Chu Suo (local police responsible for your area).

Before you obtain all the documents mentioned above you should also go through a medical examination at the appointed local hospital. It should not take you more than a couple of hours to get through the exams with the results normally being issued the day after (or if you pay more on the same day!).

Your spouse and children (if any) would also have to register with the local authorities.

Tax Rates & Liabilities

The first RMB4,000 of your earnings in China are tax free. That does not mean you can rush out and declare salaries of RMB4,500! The tax bureaus are wise to this and will demand to see concrete proof of your earnings elsewhere. If you can’t provide this they may refuse to register you, effectively immediately making your presence in China illegal.

China’s IIT rates are high compared to neighboring countries. The following table demonstrates salary brackets and tax rates, plus the quick tax deduction system. Your Total Liability can be calculated as follows:

Salary minus 4000 x Tax Rate, less Quick Deduction Figure = IIT Tax Bill
Monthly Taxable Salary—–Tax Rate—–Quick Calculation Deduction

From RMB500 to RMB20,000—–20%—–RMB375
RMB20,001-40,000—–25%—–RMB1,375
RMB40,001-64,000—–30%—–RMB3,375
RMB60,001-80,000—–35%—–RMB6,375
RMB80,001-100,000 —–40%—–RMB10,375M
In excess of RMB100,000—–45%—–RMB15,375

There are some implicit or explicit benchmarks at local tax bureaus on what a reasonable salary is in certain industries, and this could vary with your position, your education background and the country you come from. Local authorities have the power to increase your declared salary. Should this be manifestly low or inadequate to your position, they shall assume and obtain the proved confirmation that you are deliberately reducing the figure to escape from a higher IIT threshold. This can be enormously damaging for you and your employer who would be placed under far greater tax scrutiny in the future for potential tax evasion issues within the business.

Deductible Allowances

China is also pretty reasonable as regards non-taxable elements as part of an expat package, however some attention may need to be paid to the structuring of the inclusive package with certain items needing to be properly defined in the employment contract.

As a rule of thumb, if you pay for the expenses yourself (against local official invoices) and the company provides you cash allowances, then these are considered taxable. However, if the company pays for certain expenses on your behalf (for ex. Your apartment rental), then this kind of allowance is not taxable and can be deducted from your company FEIT computation basis.

Benefit Taxable as Part of Overall Package?
Hardship Allowance – Yes
Housing at Cost – No
Fixed Housing Allowance – Yes
Free Use of Vehicle – No
Fixed Expenses Paid in Cash – Yes
Reasonable Expense Reimbursed – No
Reasonable Home Leave Allowance – No
Reasonable Education for Dependents – No

Enterprises are obligated to withhold employees’ IIT when paying salaries to them; failing to do so will cause penalties. Meanwhile, the enterprises can get 2% of the IIT withheld from the tax bureau as commission. Pay attention to the calculation of the IIT if the companies are paying IIT for the employees, in this case the income has to be grossed up for the purpose of calculating IIT.

Individual Income Tax calculations for standard salaries are fairly easy to assess but get more intricate according to the complexity of the expatriate’s salary package. It makes sense to take professional advice when structuring expatriate salary packages to ensure liabilities can be planned and catered for in the most tax-efficient manner.

Non-Compliance Penalties

No Government likes tax evasion and China is no exception to the rule. The penalties for late payments, non-payment and other transgressions (naivety is no excuse) can be severe – often up to five times the amount due, plus the original liability. In cases of blatant evasion, businesses can have their licenses withdrawn and assets seized. If you have any doubts, please seek professional advice immediately – this is the one area it is best not to mess about with, fees spent on decent advise are less than the amounts levied in fines and penalties!