Investing In China: Expatriate Individual Income Tax
By David Carnes,
California, U.S.A.
dcarnes[at]chinacompanystartupguide.com
www.chinacompanystartupguide.com
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Expatriates on Business Trips to China
If you are sent to China by your company, your salary is paid outside
of China, and you spend less than 183 days in China in a calendar year,
than you must pay Chinese Individual Income Tax based on the days of the
year you spend in China (note that “China” for the purposes of this article
excludes Hong Kong, Macau, and Taiwan). If you spend more than 183 days
in China in any given calendar year, you will have to pay taxes on all
China-source income (income related to work performed in China). This
183-day threshold is reduced to 90 for nationals of countries that have
no tax treaty with China.
Foreigners Working for Chinese Enterprises in China (including
joint ventures, wholly foreign owned enterprises and representative offices)
If you hold a position such as Chief Representative of a representative
office or General Manager of a Chinese LLC, wholly foreign owned enterprise
or Sino-foreign joint venture, your individual income tax liability begins
to accrue on the minute you step off the plane in China. If you hold such
a position, even if you do not visit China during the entire calendar
year you will still have to file a tax return reporting zero China-source
income (note that even though your salary in this case would be in exchange
for China-related work, it was not performed within Chinese borders and
thus is not considered China-source income).
According to the law you should declare the full salary for the position
and pay individual income tax accordingly. In practice, however, it is
common to see foreigners declaring an "arranged" fixed salary
for their China position (with the rest being paid off-shore) and pay
taxes accordingly. This practice is illegal, and while it has been common
practice in the past, it also puts the employer at risk. Fines of several
million RMB have been assessed against foreign invested enterprises for
tolerating such practices, and the risk of being caught is increasing.
Foreigners Holding Concurrent Posts in China and Overseas
In this case you should arrive in China on a business visa, and you will
be subject to individual income tax based on the number of days physically
present in China. This is based on the total salary you are claiming from
your local position and from your employer abroad. The Chinese tax bureau
may want to see proof of earnings from your overseas employer (tax slips,
payment vouchers, etc). At the end of each month your China employer must
take copies of your passport and pay taxes based upon the number of days
you were physically present in China. The tax bureau will issue a receipt,
and this amount can be credited against the tax paid in your resident
location (ie: you won't have to pay tax both in China and your resident
location for the time spent in China as long as your country has a tax
treaty with China).
Chinese Residency and Taxation of Your Worldwide Income
If you are deemed a “tax resident” by the Chinese government (possible
if you have stayed in China for more than 5 years without residing outside
the PRC for more than a total of 90 days each calendar year or 30 consecutive
days within a calendar year), you will have to pay individual income tax
on your worldwide income. Fortunately, taxes paid overseas can be deducted
from taxes payable to the Chinese tax authorities. It is whispered that
this rule is rarely if ever enforced, however.
Work Permits
Expatriates based in China must obtain a work visa, work permit, and
residence card. You and your family will also have to register with the
local police station. You will need to take a medical exam at a designated
local hospital in order to obtain these documents (this takes a couple
of hours and results are usually issued on the same day or the day following).
Tax Rates
Chinese individual income tax rates are more steeply graduated than in
many nations, particularly the United States. Of course this is good news
if you have a relatively low income, but for those who come to China on
lucrative expatriate salaries it might mean higher taxes. Employees are
required to withhold individual income tax from their employees’ paychecks.
Note: Local tax bureaus apply formal and informal standards as to
what constitutes a “reasonable salary” in a given industry. Factors include
position, education, and country of origin. If they believe you are underreporting
your income they can unilaterally raise your declared income to the standard
and tax you accordingly.
The first RMB 4,000 of salary is tax-free. Total tax liability can be
calculated with the following formula:
(Total Salary – RMB 4,000 X Graduated Tax Rate) – Standard Deductible
= Individual Income Tax Liability
Up to RMB20,000 = 20%
RMB20,001-40,000 = 25%
RMB40,001-64,000 = 30%
RMB60,001-80,000 = 35%
RMB80,001-100,000 = 40%
Over RMB100,000 = 45%
Note: The standard deductible has been omitted from the above. It
graduates from a minimum of RMB 375 to a maximum of RMB 15,375. At the
time of this writing, the exchange rate is approximately RMB8 = US$1.
Perks and Benefits
Many common expat perks and benefits are nontaxable.
In general, expenses that you pay yourself (in exchange for local official
invoices) with cash allowances provided by your employer are taxable.
Expenses that your employer pays on your behalf (housing, etc.) are generally
considered non-taxable.
Fixed housing allowances, hardship allowances, and fixed expenses paid
in cash are generally taxable, while provided housing at cost, free use
of a vehicle, home leave allowances, educational allowances for dependents,
and reimbursed expenditures are generally nontaxable as long as the amounts
are considered “reasonable”.
Penalties
Penalties for late payment, non-payment and other violations are often
up to five times the amount due (plus the overdue amount). More serious
penalties for employers in case of intentional, systematic or repeated
violations include cancellation of business licenses and seizure of assets.
About the Author:
David A. Carnes is a California attorney working for
California Industrial City in Zhengzhou, China. His website, Start
a Company in China, offers free, step-by-step information on establishing
a business presence in China.
Read more articles by: David
Carnes
Article Source: www.iSnare.com
Published - October 2006
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