Five Questions Answered about Expat Individual Income Tax in China
As a direct result of globalization, there is an increasing amount of foreigners working in China. It’s important for a foreign person to know when they will be subject to the income tax and compliance requirements in China as there are many different categories of income recognized by China’s Individual Income Tax (IIT) Law. In this article, we’ll focus on employment income earned by foreign individuals and address the five typical questions connected with individual income taxation in China.
- What is China’s framework for IIT?
Chinese IIT categorizes employees working in China into two groups: Residents and Non-residents. Residents are classified as people who have their domicile in China; this usually includes individuals with Chinese passports or household registrations in China. A foreign national could also be a resident if the person resides in China for one full year, without a single period of absence for more than 30 days consecutively or cumulative periods of absence for more than 90 days within the same calendar year. Otherwise, a foreign national is treated as a non-domicile of China. The above, in combination with an individual’s duration of stay in China, his/her source of income, and where the salary payments are settled determine the basis on which IIT is levied. The details can be found in the following table:
The 90 days may be extended to 183 days, based on the terms of a tax treaty with China (US tax residents will use the 183 days as benchmark).
What are the general types of taxable compensation in China?
Typical income or fringe benefits earned in expat compensation packages that are taxable in China, include but are not limited to:
• Wages and salaries
• Bonuses and equity compensation
• Tax reimbursements
• Expatriate premiums
• Cost of living and automobile allowances
• Employer contribution to overseas social security
Are there any types of income that are exempt from the taxation?
Certain fringe benefits are exempt from taxation provided the amounts are reasonable and substantiated by official receipts/invoices and other supporting documentation. They usually include:
• Employee housing costs
• Relocation and moving costs
• Meals and laundry
• Language training (for the employee only)
• Children’s education expenses in China
• Home leave travel of two trips a year (for the employee only)
- How are the tax rates applied to monthly taxable employment income?
Individual income tax in China is levied monthly using a progressive tax rate. The applicable tax brackets and rates are shown below.
Monthly Tax = (Monthly Taxable Income x Applicable Tax Rate) – Quick Deduction Amount.
Quick deduction amounts are used to simplify calculating the different parts of one’s income at different tax rates; simply multiply the monthly taxable income by the highest applicable tax rate, subtracting the Quick Deduction amount to determine the net income tax due. In other words, if a person uses different tax rates apply to different tax brackets to obtain the tax amount, the result will be the same as he uses the highest applicable tax rate and subtract the Quick Deduction amount.
For example, a person’s monthly taxable income is RMB8000, his monthly income tax is calculated as the following:
(Monthly Taxable Income 8000 x Applicable Tax Rate 20%) – Quick Deduction Amount 555 = Monthly Tax 1045
If the person applies 3% to the first 1500 of the taxable income, then 10% to taxable income from 1501 to 4500 and then 20% to taxable income from 4501 to 8000, monthly income tax would equal 1045 (45 plus 300 plus 700). The same result is obtained as using the Quick Deduction method listed above.
- What are the compliance requirements for individual income tax returns in China?
The employer is responsible for filing individual income tax withholding returns on a monthly basis and remit tax payments to government agencies by the 15th day following the month an employee receives the income. The annual tax year ends on December 31. Individual income tax returns are due by March 31 of the following year. A China resident who is domiciled in China or a foreign national who is a full-year resident with annual income greater than RMB120,000 is required to file an annual individual income tax return even if taxes have been properly withheld and paid on a monthly basis and no additional tax liability is due on the annual return.