US Tax Advice for US Expatriate Living and Working in China.

Tax Guide for US Expats Living and Working in the China

Download Our Expat Tax Guide

Who Is Liable For Income Taxes In China

In China, Chinese residents are subject to tax on both their “China-Source” income (income derived within China) and “Non-China Source” income (derived outside of China).  Individuals classified as non-residents are subject to tax on the “China-Source” income only.

Who is liable.

People’s Republic of China (PRC) residents are generally subject to tax on their PRC-source and non-PRC-source income. Nonresidents are subject to tax on their PRC-source income only.

 PRC residents include the following persons:

• Individuals who have their domicile in the PRC
• Individuals who do not have their domicile in the PRC, but reside in the PRC for one full year

 Individuals are considered to have resided in the PRC for one full year if they reside in the PRC for 365 days during one calendar year. In calculating the number of days an individual is present in the PRC, temporary absences from the PRC are not excluded.  Temporary absence is defined as a single absence from the PRC for a period of no longer than 30 days, or as multiple absences from the PRC for an aggregate of no longer than 90 days.

For employment income, non-PRC-domiciled individuals who have resided in China for one full year but less than five years are subject to PRC individual income tax (IIT) on income earned from services rendered in the PRC and on income earned from services rendered outside the PRC but paid or borne by the individual’s PRC employer.

PRC-domiciled individuals are subject to PRC IIT on their worldwide income. Non-PRC-domiciled individuals who have resided in the PRC for more than five consecutive full years are subject to PRC IIT on their worldwide income for every full year of residence, beginning with the sixth year, regardless of the mode of payment and place of payment of the income.

Income subject to tax.

The taxation of various types of income which are common to foreign expatriates is described below. For a table outlining the taxability of income items.

Employment income. The types of taxable compensation under the PRC IIT law include, but are not limited to, wages and salaries, foreign service or hardship allowances, cost of living and automobile allowances, tax reimbursements, bonuses and equity compensation. The form of the individual income may be cash, physical objects, securities and economic interests in any other form.

Nontaxable compensation for expatriate employees includes housing rental, home leave (limited to twice a year for employee only), relocation or moving, meals and laundry, language training and children’s education in the PRC, provided such items are paid directly or reimbursed by the employer on the presentation of official tax invoices.

The annual bonus is treated as a separate one-month salary for tax purposes. The applicable marginal tax rate must be determined based on 1/12 of the annual bonus. This calculation method can be used by each individual only once in a calendar year. Bonuses other than the annual bonus must be treated as a part of monthly salary income and are taxed based on the aggregated amount of monthly income.

Self-employment income.  Taxable income includes compensation for independent personal services performed in the PRC, bonus payments and income specified as taxable by the Ministry of Finance.

Investment income.   Interest, dividends and other investment income from PRC sources are subject to tax at a flat 20% rate, with no deductions allowed.

Dividends, interest, royalties and rental income received by non-resident foreign nationals from PRC sources are normally subject to a 10% withholding tax under most double tax treaties entered into by the PRC on the approval of the local tax authorities in charge.

Dividends paid by foreign-investment enterprises to the non-resident foreign nationals in the PRC are exempt from tax.

 Directors’ fees.  Directors’ fees are considered income from independent personal services and are taxed as income derived from labor services. However, directors’ fees paid to a company director are taxed as “wages and salaries” if he or she is an employee of that company or a related company. If the director is not also an employee of the company, his or her directors’ fees may be taxed under the “labor service” category.

 If directors’ fees are taxed under the “labor service” category, they are taxable as a lump sum, with the tax liability computed by applying the rules outlined for income from independent personal services. If a directors’ fees are taxed as “wages and salaries,” they must be included in the salary for the month of receipt of the fees and are subject to the progressive tax rates ranging from 5% to 45%.

Temporary relief.   Under a temporary measure, for dividends and bonuses derived by individuals from domestic listed companies, only 50% of the income is chargeable to IIT. Also, interest income derived by individuals from domestic banking institutions on deposits is temporarily exempt from IIT.

Exempt income. The following types of income are exempt from tax:

•  Monetary awards granted by provincial People’s Governments, State Council ministries and commissions, units of the People’s Liberation Army at army level or above, or by foreign or international organizations for achievement in fields, such as science, education, technology, culture, public health, sport and environmental protection
•  Interest on state treasury bonds and state-issued financial bonds and national debt obligations
•  Subsidies and allowances paid in accordance with the centralized State Council
•  Welfare benefits, disability pensions and relief payments
•  Insurance indemnities
•  Military severance pay and demobilization pay
•  Resettlement allowances, severance pay, retirement pay, retirement pensions and cost-of-living subsidies of personnel who have left their jobs on a permanent basis to rest and recuperate, and subsidies distributed to cadres and workers, in accordance with centralized state regulations
•  Income of diplomatic representatives, consulate officials and other personnel of foreign embassies and consulates in China who enjoy tax exemptions in accordance with the relevant Chinese laws
•  Tax-exempt income stipulated in international conventions
•  Tax-exempt income approved by the finance department of the State Council

Capital gains.  After deducting costs and related expenses, income derived from the sale or transfer of movable or immovable property in the PRC is taxed at a flat 20% rate.

Capital gains derived from transfers of shares listed on China stock exchanges are exempt from PRC IIT.

 Foreign individuals are subject to a 20% tax on gains derived from the sale of equity in a foreign-investment enterprise in the PRC (for example, an equity joint venture).

 The applicable tax rate may be reduced for individuals resident in treaty countries.

 Taxation of employer-provided stock options.  Taxable income is recognized on the date an employee exercises an employer-provided stock option. For foreign nationals, stock option income is taxable if it is considered attributable to PRC employment. In general, a stock option that is granted and vested when the employee is resident in the PRC is considered to be PRC-source taxable income.

The amount of taxable income is the difference between the fair market value of the stock on the exercise date and the exercise price. The taxable income is reported in the month of exercise as stand-alone employment related income, which is subject to individual income tax at progressive rates ranging from 5% to 45%. In addition, for stock options of publicly listed companies, the employer may divide the total stock option benefits into the number of months that the employee has worked in the PRC (capped at 12) for the purpose of determining the applicable individual income tax rates (this treatment is referred to below as the “favorable tax treatment”). Also, all exercises of stock options in the same calendar year must be aggregated for the calculation of PRC IIT.

 However, the favorable tax treatment applies only to employees of publicly listed companies (including branches) and their subsidiaries that are at least 30% owned by the listed companies.

For companies indirectly held by listed companies, the ownership percentage is determined by multiplying the respective shareholder percentage at each level of ownership.

In addition, the favorable tax treatment does not apply under the following circumstances:

•  Stock incentive income is received by employees of unlisted companies and companies other than those qualifying based on the ownership rule above.
•  Stock incentive income is derived from schemes set up before the listing of the company.
•  A listed company does not complete tax registration with the in-charge local tax authority.

 Deductions

 Deductible expenses.   A Chinese individual is allowed a flat RMB 2,000 deduction each month in computing his or her net taxable income. Effective from 1 March 2008, expatriate employees are allowed an additional deduction of RMB 2,800 per month. Approved charitable donations are also deductible.

 For foreign expatriates, overseas social security contributions made by individuals are not deductible.

If an employer is responsible for paying the employee’s PRC income tax liabilities, the employee’s taxable income is grossed up by the amount of the payment. Any hypothetical tax, which is an amount withheld by the employer as full or partial compensation for satisfying the employee’s PRC tax liability, is normally allowed as a deduction in computing the employee’s net taxable income. However, if the PRC tax liability calculated by the non-gross up method without deducting the hypothetical tax is higher than the tax liability calculated by the gross-up method after deducting the hypothetical tax, the higher tax amount must be paid to the tax bureau.

Personal deductions and allowances.   On the approval of the local tax bureau, employees who do not have their domicile in the PRC and who have job responsibilities both within and outside the PRC may be allowed to report tax on a time-apportionment basis.   However, the total compensation (both PRC income and non-PRC income) must be reported in the PRC for tax purposes, and the tax can be prorated based on the number of days the employee stays in the PRC. To qualify, an employee must provide supporting documentation.

 No distinction is made between married and single taxpayers, and no relief by allowance or deduction is provided for dependents.

Business deductions.   Independent personal services income, royalties, and rental or leasing income is allowed a deduction of RMB 800 or 20% of income, whichever is higher.

A taxpayer may claim a deduction for reasonable repair fees from rental income, limited to RMB 800 per month, on the presentation of official invoices and the approval of the local tax authorities in charge.

Relief for losses.  Except for individual proprietorship enterprises and individual equity partnership enterprises, no measures exist for the carryover of losses.

 Nonresidents.  Individuals who do not have their domicile in the PRC and who stay in the PRC for less than one full year in a calendar year are considered nonresidents and are subject to individual income tax under different rules, as described below.

 Resident for 90 days or less.   Individuals who reside in the PRC continuously or intermittently for not more than 90 days during a calendar year are treated in the following manner:

•  The expatriate is exempt from individual income tax if the salary is paid and borne by an overseas employer.
•  Employment income paid or borne by the employer’s establishment in the PRC is subject to individual income tax to the extent that the income is attributable to services actually performed in the PRC. For these purposes, an establishment includes a representative office and the site of a contract project in the PRC.
•  Normally, the tax liabilities are apportioned to PRC and non-PRC services in accordance with the actual number of days the expatriate resides in the PRC. However, for tax determination purposes, employment income paid by an employer in the PRC and by an employer outside the PRC and not charged back against a PRC-registered entity must be aggregated in calculating the tax liabilities payable. The apportionment is based on the tax liabilities, which is calculated on the total earned income.

 Accordingly, individuals with higher earned income are unfavorably affected by the progressive tax rates system.

•  The residency threshold is increased from 90 days to 183 days if the expatriate is resident of a country that has entered into a double tax treaty with the PRC (a tax treaty expatriate).
• Residents for more than 90 days but less than one full year.   Individuals who reside in the PRC for more than 90 days (183 days for tax treaty expatriates), but less than one year, are treated in the following manner:
•  The expatriate is subject to individual income tax on employment income derived from services actually performed in the PRC.
•  Assessable income includes all employment income, whether it is paid (or borne) by an employer inside or outside the PRC.
•  Employment income attributable to services performed outside the PRC is exempt from individual income tax. Normally the tax liabilities are apportioned to PRC and non-PRC services in accordance with the actual number of days the expatriate resides in the PRC.
• Income paid and borne by an employer outside the PRC with respect to these individuals is taxed in one of the following ways:
•  The income is exempt from individual income tax if the individual resides in the PRC for not more than 90 days during a calendar year (or for tax treaty expatriates, not more than 183 days during a calendar year or any 12-month period, depending on the relevant tax treaty terms).
•  The income is subject to individual income tax if the period of residency in the PRC extends more than 90 days during a calendar year (or for tax treaty expatriates, more than 183 days during a calendar year or any 12-month period, depending on the terms of the relevant tax treaty), to the extent that the income is attributable to services performed in the PRC.

 Registration requirement.   To claim the treaty entitlement provided under relevant tax treaties for dependent service income (normally refers to employment service income), non-tax residents must register with the in-charge tax authorities after they have resided in China for more than 90 days but less than 183 days (or 6 months) during one calendar year (or any 12-month period depending on the relevant treaty) (that is, before the tax liability arises) or when they file tax returns after having stayed in China for more than 183 days (or 6 months).

B. Other taxes

Net worth tax.  No net worth tax is levied in the PRC.

Estate and gift taxes.  No estate and gift taxes are levied in the PRC.

 C. Social security

 Chinese nationals employed by PRC entities are eligible for the social security system in mainland China. Under the new PRC Social Security Law that will take effect on 1 July 2011, foreign nationals working in mainland China must also participate in the PRC social security system. However, at the time of writing, no implementation rule has been announced and public opinions continue to be sought regarding the draft measures.  Special rules apply to foreigners from certain countries or territories. Under the totalization agreements with Germany and Korea (South), if German and Korean employees do not contribute to their home country’s pension and unemployment insurance during their employment in China, they should contribute to pension and unemployment insurance in China. Also, under rules effective from 1 October 2005, employees from Hong Kong, Macau and Taiwan, who have entered into local labor contracts should contribute into the PRC social security system.  Social security tax rates vary among different cities. Employers and employees are subject to social security taxes at an average rate of 30% and 11% of gross income, respectively. For this purpose, the amount of gross income is capped at three times the average salary in the city for the preceding year as published by the local government.

You can read more about the China Income Taxes and Procedures

We have been preparing US income tax returns for US Citizens and permanent residents living in China for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.

We have scores of clients located in China and know how to integrate your US taxes into the local income taxes you pay.  Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.

As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end.  (You cannot file using the China tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.

There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership.   If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form.  These penalties are due regardless of whether you owe income taxes or not.

There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits.  There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.

If you are self-employed, you will have to pay US self-employment taxes (social security).   If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in China.

We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident.  You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.

Let us help you with your US tax returns, US tax planning and other US tax and legal concerns.  Download our expat tax questionnaire or request a request a consultation by phone, skype or email