All expat workers in Shanghai are subject to tax.
China has a multi-tiered system of tax liabilities for foreigners, which has lead to some confusion, particularly over the so-called “90 or 183 days rule”. China’s income taxes are among the highest in Asia, with rates ranging from 5% to 45% depending on how much you earn. Tax collection is pretty efficient in China, and evading taxes can lead to heavy fines and even life imprisonment.
Tax rates are uniform for Chinese nationals and for foreigners. Expatriates who live in China for a limited time are only taxed on the income they earn within the country (although there are some exceptions for very short stays of foreign nationals from countries which have an income tax treaty with China). Any income from elsewhere is tax free. Expatriates who live in China for more than five years have to pay tax on all their income, whether generated in China or elsewhere.
Normally, your employer will withhold the tax from your salary and pay it to the tax authorities on a monthly base. However, it is worth keeping receipts (fapiao) for things like meals and laundry services, as you can offset these against your taxable income, as well as ‘reasonable’ relocation costs, business trip expenses and language training.
Expatriates on extended business trips to China: If you are sent by your organization to China and your salary is paid off-shore (probably in your home country) and you spend more than 183 days in China in a calendar year, than you have to pay IIT in China based on the days you effectively spend in the country. This means that if you spend in China, let’s say, 184 days within a calendar year, than you would have to pay taxes on all income sourced from China (meaning income related to your work performed in China).
Foreigners working for legal enterprises in China: Without going into too many complicated calculations and theories, if you hold positions such as the Chief Representative (CR) of a Representative Office (RO) or the General Manager of a Chinese Limited Company, Wholly Foreign Owned Enterprise or a Joint Venture anywhere in China, then you are subject to IIT from the first day you commence work in the country. Interestingly, should you not actually visit China within a calendar year but are still acting as the Chief Representative of a Representative Office, then zero tax filings should still be made monthly to the local authorities.
Foreigners holding concurrent posts both in China and elsewhere: First, you should be arriving in China on a business visa, and are subject to IIT based on the number of physical days you are in China. This is assessed upon the total salary you are claiming from your local employment position and from the parent company overseas – the Chinese tax bureau may want to see proof of earnings from your parent company (tax slip, payment voucher etc) to support your case. At the end of each month, your office in China should take copies of your passport, together with the entry/exit stamps for that month, and file and pay for taxes based upon the number of days spent in the PRC. The tax bureau will issue a receipt showing this has been paid, this can be credited against the tax paid in your resident location (i.e., you won’t have to pay tax both in China and your resident location for the time spent in China).
China residency status and IIT on your worldwide income: Be aware that if you are regarded as tax resident by the Chinese government, which means you have stayed in China for more than 5 years (without residing outside the PRC for more than 90 days cumulatively each calendar year or 30 consecutive days always within a calendar year), you have to pay IIT on your worldwide income without limitation of source. This means that shall you have income elsewhere related to property rentals or interests, these shall also be declared to the Chinese tax authorities. The taxes paid overseas can be deducted from the taxes payable to the Chinese tax authorities. It’s easy to avoid so count those days and give yourself a month out of China every 5 years.
Tax Rates & Liabilities: The first RMB 4,000 of your earnings in China are tax free for foreigners. That does not mean you can rush out and declare salaries of RMB 4,500! The tax bureaus are wise to this and will demand to see concrete proof of your earnings elsewhere. If you can’t provide this they may refuse to register you, effectively immediately making your presence in China illegal. China’s IIT rates are high compared to neighboring countries. The following table demonstrates salary brackets and tax rates, plus the quick tax deduction system. Your Total Liability can be calculated as follows:
(Salary minus 4000) x (Tax Rate) less (Quick Deduction Figure) = IIT Tax Bill
|Monthly taxable salary
|Quick calculation deduction
|From RMB5000 to RMB20,000
|In excess of RMB100,000
Tax-free Imports to China
A long-term expatriate resident is allowed to bring into China a reasonable quantity of tax-free personal belongings, including a certain amount of clothing, small household appliances and books. In order to benefit from the tax-free allowances, your need to present to customs authorities your long-term residence certificate, your passport, your employer’s business license and any available receipts and invoices for the items being brought into the country.
Items over and above the tax-free amount are taxed at between 20% and 100% of their official value. Imported cars are taxed at around 100% of their ‘official price’ (often much higher than their actual price), plus a 20% license plate tax. Details of the duties to be paid on various items can be obtained from the Chinese consulate in your home country.
As an expatriate you are entitled to the following tax exemptions:
- Housing Allowance
- Reasonable Business Trip Allowance
- Meal and Food Subsidies
- Moving and Relocation Expense
- Reimbursement Laundry expenses
- Reimbursement Language training
- Home leave for employee and family (proof of tickets)
- Reasonable allowance for children’s education expenses
Tax reporting is done every month. Employers are required by law to deduct Individual Income Tax from employees’ wages and salaries, and to file tax returns with the authorities. Delaying monthly payments will result in the company receiving a heavy fine. Expats who spend 5 uninterrupted years in China are subject to tax on all employment income regardless of which country the income is sourced from. China Individual Income Tax (IIT) law is open to much interpretation so it is strongly recommended that you retain the services of experts who can give nationality-specific financial advice.
For further information, consult the following resources: