(But first a DISCLAIMER: I am not a tax or financial professional. While I did my best to understand the information available from different sources (PWC, KPMG, ECOVIS, China-Briefing) and present it in an easy to read format, I cannot guarantee that everything is presented correctly. In addition, tax laws and their implementation may change over time. This primer is meant to be informational only. Please consult a tax professional for advice).
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 different tax 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 for work 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 of China.
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 for temporary 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 in China.
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 to December 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 the clock 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”. Furthermore, travel days in and out of China don’t count as full days outside of China.
Be aware of the 5 year rule!
How much income tax do you have to pay in China
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 up in 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 to 35% 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 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.
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 withholdings 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 for the foreign tax (Foreign Tax Credit FTC in the US).
Thank you for bearing with me through this long post on a dry topic. If you found this helpful, please share.