Expats who live and work in China are required to pay individual income tax (ITT) and those who are employed by a foreign-invested company in China need to pay tax from the very first day that they arrive in the country.
While ITT payments are normally automatically deducted from employee’s wages and paid to the tax authorities on a monthly basis (within 15 days of the end of each month). However, there is also a requirement for expatriates to complete and submit an annual IIT declaration within three months of the end of the previous calendar year (i.e., between January 1, 2013 and March 31, 2013 for the 2012 calendar year). The deadline for the 2012 tax year will be the 31st March 2013. It is a legal requirement that all employees who are liable for IIT file the self-declaration tax return if they meet one or more of five specific conditions:
- Their annual income is in excess of RMB120,000.
- They earn income from two or more different sources in China.
- They earn income that is derived from sources outside China.
- They receive taxable income for which there is no withholding agent.
- They meet any other conditions that are specified by the State Council.
A number of different sources of are considered to constitute income and are therefore subject to IIT.
- Wages and salaries
- Income from individually-owned industrial and commercial households
- Income from subcontracting or subleasing
- Remuneration for labor services
- Author’s remuneration
- Income from royalties
- Income from interest, stock dividends and bonuses
- Income from lease, transfer of property
- Incidental income
Determining your IIT Liability
Whether or not you will be subject to IIT very much depends on the source of your income and the amount of time that you spend in China on an annual basis.
China vs Non-China sourced income
Income that is sourced in China (China-sourced income) refers to any income that is paid to you from a domestic or foreign source to cover work that you have performed under your employment in China. Non-China sourced income refers to income that you received as a result of work you have performed outside China.
Time Spent in China
The number of days per year that you reside in China impacts whether you are required to pay tax on both your China and non-China sourced income:
- Individuals who stay in China for fewer than 90 days in a single calendar year (or 183 days for residents of countries that have signed a double taxation treaty with China) are exempt from IIT if the employment income is paid by an overseas entity.
- Individuals who stay in China for more than 90 (183) days, but less than a year, are subject to personal income tax on their employment income derived from work performed in China – regardless of which entity is paying.
- Individuals who reside in China for more than one year, but less than five years, are subject to personal income tax on both China-sourced and foreign-sourced income borne by a China-based entity. Foreign individuals who reside in China for more than five years are taxed on their worldwide income.
- After an individual resides in China for five years, in the sixth year, if the individual resides in China for less than a year, the five-year period is reset and the “90 (183) day rule” applies again.
Exemptions to the 190 day rule
The 90 (183) day foreign employment exemption rule does not apply to any expatriates that are considered to hold a senior management position. Such expatriates are required to pay IIT regardless of the number of days they reside in China during a calendar year. Positions that are considered to constitute senior management include, but are not limited to, the following:
- Chief executive officer
- General manager
- Vice president
- Chief representative
- Individuals that hold positions in specific professional fields, such as chief engineer or chief financial officer
- Certain individuals who do not hold a title such as manager but carry similar responsibilities or have a great influence on business operations or decisions
Income tax rates in China
The income tax system applied in China is progressive and rates range between 3 and 45 percent of an individual’s monthly income. A standard monthly amount of RMB 4,800, together with social insurance payments, is deducted from the salaries of foreign workers before the tax payment is calculated. Taxable income includes salaries, bonuses, year-end bonus, profit shares, allowances or subsidies or any other income related to job or employment.
Income Tax Rates for 2012 tax year
|Tax Grade||Monthly Taxable Income (RMB)||Rate|
|2||1500 < RMB ≤ 4500||10%|
|3||4500 < RMB ≤ 9000||20%|
|4||9000 < RMB ≤ 35000||25%|
|5||35000 < RMB ≤ 55000||30%|
|6||55000 < RMB ≤ 80000||35%|
|7||RMB > 80000||45%|
Some employee benefits are not considered to constitute taxable income. These include:
- Employee housing costs
- Reasonable home leave fares of two trips per year for the employee
- Reasonable employee relocation and moving costs
- Reasonable reimbursement of certain meals, laundry, language training costs and children’s education expenses in China
- Income that is derived from sources other than direct employment
Non-employment income is subject to different tax rates than employment income and these range between 5 and 35 percent, depending upon the source of the income. Full details can be found in China Briefing China Tax Guide.
Where should the annual self-declaration be filed?
The self-declaration rules state that individuals who are required to file a self-declaration do so in the following manner:
- Those employed within China should make their declarations at the local tax authorities of the place where their employers are located.
- Taxpayers with two or more employers within China should make the 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 incomes include incomes from production or business operations by individual households engaging in industry and commerce, or incomes from contracting or leasing operations of enterprises or institutions (hereafter referred to as incomes from production or business operation), should make the declaration at local tax authorities in the place where one of these businesses are resident
- Taxpayers who have no employer in China, and whose annual incomes include no incomes from production or business operation, should make the declaration at local tax authorities in their place of their residence registration.
Content for this article was adapted from the China Briefing China Tax Guide. Further information and advice can be found within the guide. Expatriates should always seek professional help when filing their tax returns.