Individual Income Tax (IIT) for Expats in China 2017
Working in China as an expat can be exciting and rewarding, but it also means that you have to deal with Chinese income tax.
China’s Individual Income Tax (IIT) Law stipulates that all individuals working and deriving income from within the territory of China are subject to IIT.
While Chinese nationals are taxed on all income sourced both domestically and overseas, non-Chinese nationals are only taxed on income deriving from within China.
An individual’s salary is taxed according to progressive rates, while other types of income are taxed at variable rates depending on their nature.
Though IIT is usually filed by employers’ HR and payroll teams on behalf of employees, both parties should be aware of tax thresholds, and implement sufficient salary planning to reduce tax liability. Furthermore, individuals are required to make annual declarations before the end of the financial year.
In this article, we give a general overview of how IIT works for foreign nationals working China in 2017.
Taxable income for expatriates
The calculation for IIT liability is dependent on the source of income, how long one has worked in China, and whether or not income is sourced within or outside of China.
Whether or not income is sourced inside or outside of China is determined by how long an individual has actually worked in China. The following income types are deemed China-sourced income regardless of where the payment is made:
Income from providing services in China;
Income from leasing property to a lessee for use in China;
Income from transferring property located in China, such as buildings and land-use rights;
Income from licensing the use of proprietary rights in China; and,
Interest, dividend, and bonus income derived from companies, enterprises, and other organizations or individuals in China.
Employers and expatriates that would like to see more in depth information on tax liability, including scenarios that assess ‘time in China’ calculations
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IIT on income and deductions
Salary
IIT on salary, which is any income received from employment including bonuses and stock options, is set at progressive rates from three to 45 percent. It is usually withheld from wages by employers and paid to the tax authorities on a monthly basis.
The basic formula for calculating monthly IIT is as follows:
Monthly taxable income x applicable tax rate – quick deduction = monthly tax payable
Monthly taxable income is calculated after a standard reduction of RMB 4,800 for foreign nationals, including residents of Hong Kong, Macau, and Taiwan.
Contributions to Chinese social insurance as well as other employment benefits can also be added to pre-tax deduction, as long as relevant requirements are met and relevant fapiao are provided. Employment benefits include:
Allowances for housing, meals, relocation, and laundry expenses;
Relocation expenses upon commencement or cessation of employment in China;
Reasonable business travel expenses and two personal trips to the individual’s country of origin; and,
Reasonable allowances for language training and children’s education.
Such allowances are not obligatory for an employer to provide, and should be discussed with employees. As benefits paid in cash may be subject to IIT, reimbursement is an effective alternative for reducing IIT.
Annual bonuses
Many companies in China offer annual bonuses at the end of the year, for which IIT is calculated as follows:
IIT on lump sum – annual bonus = (lump sum annual bonus x monthly IIT rate applicable to 1/12 of lump sum annual bonus) – corresponding monthly quick deduction
To determine the applicable IIT rate on the bonus, the lump sum annual bonus should be divided by 12 to find the corresponding tax rate, shown in the table below:
Annual bonuses are often a major factor for employees to select jobs. However, the inclusion of an annual bonus in taxable income can significantly impact tax liability.
Stocks, restricted stock units and equity bonds
Stock options, restricted stock units (RSUs), or equity incentives are forms of compensation offered by an employer to an employee in the form of company stocks and shares.
They are given to employees over a set period of time according to a planned schedule, usually based on performance or time milestones.
According to relevant laws regarding stocks and bonds, IIT applies to income derived from such shares and units only upon the date they are obtained or ‘activated’, and not from the date they are granted.
Careful salary planning can allow employees to take home as much value by staying within the applicable tax rate thresholds as stipulated by China’s tax laws, as minimal salary increases may push taxable income over the thresholds and significantly affect IIT liability.
Payment and declaration
Although IIT is usually automatically withheld from salaries by employers and paid monthly to tax authorities on a monthly basis, an annual IIT declaration should be submitted to the relevant tax authorities within three months of the end of the previous calendar year.
This should be done between January 1 and March 31 for the previous calendar year for taxpayers who meet at least one of the following five conditions:
Have an annual income (both employment income and non-employment income) of more than RMB 120,000;
Derive income from two or more places in China;
Derive income from sources outside China (this applies only to a resident or non-resident individual in China who has resided in China for more than one year);
Received taxable income for which there is no withholding agent;
Other conditions required by the State Council.
Individuals are required to submit their annual IIT declarations regardless of whether their IIT liabilities have been fulfilled. A non-resident individual residing in China for less than one year during the tax year is exempt from this requirement.
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Anti-tax evasion efforts increase importance of compliance
China’s tax authorities have been stepping up anti-tax evasion measures in recent years, having improved investigation methods aimed at foreigners. In Beijing, by screening zero tax declarations and singling out foreign enterprises with high profit margins and foreign personnel, the Chaoyang Local Taxation Bureau was able to collect over RMB 200,000 worth of IIT evaded.
Expatriates and their employers should there seek to ensure IIT is being paid in a correct and timely fashion, and to conduct annual declarations. In Beijing and Shanghai, and other major cities, individuals are able to make annual declarations online, through WeChat official accounts and on other mobile phone apps. Efforts to improve the ease of filing will go a long way to improve compliance, but expatriates and their employers will still need to put their best foot forward.
Hope you got it , Here is brief summary
Who has to pay income tax in China?
If you have to pay income tax in China depends on two key factors:
How long you stay in China
The source of your income
The combination of time in China and source of income determines what income is taxable in China:
Length of stay in China
As you would image, the longer you stay, the more of your income is taxable in China. There are three time-frames that trigger differenttax rules: The 90 day rule (which becomes the 183 day rule if a tax treaty is in place), 1 year rule, and 5 year rule. More on that below.
Source of Income
Where the work is performed and who pays for the income also affects the Chinese income tax. Income sourced within China vs sourced outside China, as well as income paid by a Chinese entity vs foreign entity are treated differently under the tax rules.
The 90 day rule
This rule applies if you spend less than 90 days in a tax year in China. If there is a tax treaty between China and your home country,this threshold is usually extended to 183 days.
Under this rule you only have to pay IIT on income forwork that was done in China and paid for by a Chinese entity or individual.Income paid by an overseas employer is exempt from Chinese income tax, even if the work is done in China.
However, Senior Managers may still have to pay IIT on income paid by a Chinese company, even if the work is performed outside ofChina.
The 1 year rule
If you stay more than 90 days (or 183 days with a treaty) but less than 1 year during the tax year, you have to pay IIT on all income for work performed in China, no matter if the income is paid by a Chinese or an overseas entity.
If you stay more than 1 year but less than 5 years,then all income received from Chinese or foreign employers for work performed in China is taxable. In addition, income paid by a Chinese employer fortemporary work outside of China is also taxable. Only income from a foreign employer for temporary work outside of China is exempt from Chinese income tax.
The 5 year rule
Once you stay in China for more than 5 consecutive years,the dreaded 5 year rule applies. After this time-frame all income sources within and outside of China, so basically your worldwide income, is taxable inChina.
The rule states that the relevant period is “five full consecutive years”, so the tax rule applies from the sixth year onward spent in China. A full year is defined as the Chinese fiscal year from January 1 toDecember 31. So for instance, if you arrived in China during February 2011 the full years will be counted from January 1, 2012.
Any year that you didn’t leave China for more than 30 full consecutive days or for more 90 cumulative days counts as a full year.
This means that to break the 5 year rule and reset theclock back to zero, you need to leave China for a period of more than 30 full days consecutively or 90 days cumulatively within a calendar year. Please note that the rules says “more than”, not “at least”. Further more, travel days in and out of China don’t count as full days outside of China.
Be aware of the 5 year rule!
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How much income tax do you have to pay in China
Tax rates
China has progressive income tax rates, so the more you earn, the higher a tax rate applies. Non-residents pay the same tax rate as residents.
Individual income tax rates in China are rather high for higher earners. For employed expats, the tax rate starts at 3% and goes upin seven steps to 45% for taxable monthly income over 80,000 RMB.
The first 4,800 RMB of income are tax exempt for expats.In addition, each tax rate also has a Quick Deduction. So your tax calculates as follows:
(monthly taxable income x tax rate) – quick deduction
For freelancers (labor services), the tax rate starts at 20% and goes up to 40% for monthly income over 50,000 RMB.
Business income tax rates start at 5% and go up to35% for annual taxable income over 100,000.
Other types of personal income, like interest, dividends,or rental income, are typically taxed at a flat rate of 20%. However, there are exemptions. For example interest on a bank savings account deposit income is exempt from tax.
Taxable income
Taxable income includes the base salary, incentive compensations like commissions and bonuses, cash allowances and employer contributions to overseas insurance like social security.
In addition to the standard deduction of 4,800 RMB and quick deduction, there are a number of allowances that can be deducted. Talk to your HR department or a tax professional about the details, as these allowances have to meet certain criteria.
Tax returns
Annual individual income tax returns are due by 31 March of the following year.
If you are employed by a company, your employer must file monthly tax with holdings and a year-end tax return. If you don’t have an employer, it is your legal obligation to file tax returns.
You will receive an official document with red stamps that shows the amount of tax you paid in China. Keep this document. You will need it when transferring money out of China to prove that you paid all your Chinese income taxes. Depending on your home country’s tax system, you may also need the tax document to claim a credit forthe foreign tax (Foreign Tax Credit FTC in the US).
Thank you for bearing with me through this long post on adry topic. If you found this helpful, please share.
Source: china-briefing.com/beijingexpatguide.com
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