China has a multi-tiered system of tax liabilities for foreigners, which has led to some confusion, particularly over the so-called 90 or 183 days rule. For those sent to China by a foreign company, who have their salary paid elsewhere (probably in their home country), and spend more than 183 days of a calendar year in China (or 90 if they are from a country that does not have a double tax treaty with China), they need to pay IIT in China based on the number of days they effectively spent in the country.

New-to-China expatriates with full time employment here need to make sure they are in compliance. The onus is on the individual to ensure this and fines can be levied and passports censured if this is not carried out. Newcomers need to obtain a work visa, residence permit and register for tax upon commencing or signing contracts. The employer should arrange this for the employee. This is a serious issue and only gets potentially worse every month it is ignored. At some point, when an individual’s stay in China ends, they will have to reconcile with the authorities over their income. Immigration records, visa type and length of stay information are shared between the immigration authorities and the tax bureau.

The Chinese government regards individuals as tax residents when they have stayed in China for more than five years without residing outside the PRC for more than 90 days cumulatively each calendar year or 30 consecutive days within a single calendar year. A tax resident is required to pay IIT on their worldwide income without limitation of source, meaning that income elsewhere related to property rentals or interests will also needs to be declared to the Chinese tax authorities. The taxes paid overseas can be deducted from the taxes payable to the Chinese tax authorities.

Individuals in China with annual incomes in excess of RMB120,000 need to complete and submit an annual self-declaration of their income earned in 2009 by the end of March 2010. This Individual Income Tax Declaration Form needs to be completed and submitted to the local tax authority in addition to regular routine monthly tax filings by taxpayers with and income in excess of RMb120,00 or any other the other following conditions: income derived from two or more places inside the People’s Republic of China; income derived partly or fully from sources outside the People’s Republic of China; those who have received taxable income but not paid tax; as well as other conditions regulated by the State Council.

This is a mandatory obligation for those who qualify. Regardless of if the individual has declared and paid the correct individual income tax on a monthly basis, they still must complete self-declaration of their 2009 income to the tax authorities.

Information that needs to be given of for the declaration includes: name, ID type and number, profession, employer, place of residence, address in China, post code and telephone number, as well as tax data such as the annual amount of any different sourced incomes, taxes payable, taxes prepaid and withheld, foreign tax credit and taxes owed or overpaid. In addition, foreigners should declare their nationality and date of arrival in China.

The office where the forms need to be filed is dependent on the situation of the individual making the declaration. Taxpayers employed within China need to file their declarations at the local tax authorities of the place where their employers are located. Taxpayers with two or more employers within China need to file their declaration at a fixed local tax authority in the place where one of the employers is located. Taxpayers with no employer in China, and whose annual income includes money from production or business operations by individual households engaged in industry and commerce, or money from contracting or leasing operations of enterprises or institutions, should file their declaration form at the local tax authorities in the place where one of these businesses are located. Taxpayers who have no employer in China, and whose annual income does not include any money from the aforementioned production or business operations, should file with the local tax authorities in their place of residence.

Annual income includes: wages and salaries, income from production or business operation conducted by self employed industrial and commercial households, income from contracted or leased operation of enterprises or social service providers partly or wholly funded by state assets, remuneration for providing services, author’s remuneration, royalties, interest dividends and bonuses, income from lease of property, income from transfer of property, incidental income and other income.

Tax rates and liabilities
The first RMB4,800 of an expatriate’s earnings in China is tax free (there are benchmarks at local tax bureaus on what a reasonable salary is in certain industries and this could vary with position, educational background and nationality). Local authorities have the power to increase declared salaries should they determine that a salary is manifestly low or inadequate to the position. To determine if someone is deliberately reducing their salary figures to escape a higher IIT threshold, they may demand to see concrete proof of earnings elsewhere. China’s IIT rates are high compared to many countries worldwide.

China is reasonable regarding non-taxable elements of an expatriate package, but attention should be paid to the structuring of the inclusive package – certain items need to be properly defined in the employment contract. The key issue is not whether the company or the individual pays such expenses, but whether the full amount of any such allowance, as stated in the contract, is actually used. For example, if an individual receives a housing allowance of RMB5,000 from their employer, but only RMB3,000 is used for rent (an invoice from the landlord is needed for proof), then the remaining RMB2,000 is taxable.

It is important to note that income sourced externally from China may be tax exempt from IIT (note, this does not apply if your salary is part paid in China and part overseas, under such circumstances the complete salary must be declared). In addition, basic endowment insurance, government-regulated basic medical insurance, unemployment insurance and housing funds paid by the taxable individual’s employer and the taxable individual himself may also be tax exempt.

Issues of note for expatriates living in China
Expatriates who are not usually residents of China, but have lived in China for at least one full year, and whose income has derived from sources within China are subjected to individual tax and have the legal responsibility to complete the annual tax return. However, an expatriate who holds the position of senior manager in a Chinese domestic enterprise is subject to individual income tax on China sourced income, unless his or her “actual working period” within China did not exceed 90 or 183 days, dependent upon whether or not their country of nationality has or does not have a double tax treaty with China. Regardless of tax treaty, all such personnel should also complete an annual self-declaration.

Expatriates who have lived in China for more than one year, but no more than five years are required to report the salary or wages excluding income which has derived from sources outside China such as commercial or industrial income. The company is obligated to process monthly IIT filings on behalf of the expatriate employee. However, expatriates have the responsibility to complete the annual income tax self-declaration.

Individuals who have paid tax promptly but who do not complete the annual self-declaration may face a personal tax audit by the tax bureau and a potential tax fines risk for late tax filing.

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Related Links:

China Adjusts Home Ownership Transfer Taxes
China's Annual Audit Regulations
Contract work, visa intricacies, and the 183 day rule

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