Expats, Pay Your Taxes!

Two things in life are certain: death and taxes, and you can’t cheat either. You will eventually have to pay both, so find out more on china’s new tax laws, and stay ahead of the game.

The new individual income tax (IIT) law in China, which came into effect January 1, introduced key rules that changes the way tax residency is determined for expats.

To summarize, the new tax residency rule impacts foreigners in three ways:

Residency status
Tax residency status will be triggered more easily because of shorter time requirements. For expats who reside in China for over 183 days but less than a year, the new rule is less beneficial, considering income sourced outside of China but paid by Chinese enterprises or individuals will be taxable in China.

Six-year rule
Foreigners don’t have to leave China as frequently to get IIT exemption on global income. The six-year rule under the new IIT system enables expats to leave China every six years, instead of five years, to reset the tax clock on their global income.

The clock-reset rule is less convenient for certain expats working in China, such as those who travel internationally often. Previously, expats could reset the five years tax clock by leaving China for over 90 days cumulatively, but under the new Law, they can only reset the clock by leaving China for over 30 days.

The new IIT Law unifies the standard deductions of resident individuals and non-resident individuals to 5,000 RMB (734 USD) per month. Previously, the standard deduction for resident individuals was 3,500 RMB (514 USD) per month, while the amount was 4,800 RMB (705 USD) for non-resident individuals.

The effect of this measure is less significant for foreigners working in China, considering the standard deduction for domestic employees increased by more than 40 percent, while it only increased around four percent for expats.

The new IIT system introduced special additional deductions for specific expenditures for foreign employees, if they fulfill requirements of each specific deduction, which is the same standard as local employees.

The special additional deductions are children’s education expenses, continuing education expenses, healthcare costs for serious illness, housing mortgage interest, expenses for supporting the elderly and housing rent.

To enjoy the special additional deduction, taxpayers are required to provide relevant information to the tax bureau and retain the relevant documents as evidence for five years. For expats, the only extra step is that they need to visit the tax bureau in-person to get their tax ID, which is necessary to obtain for the application.

Expats who choose to benefit from these special additional deductions are not able to benefit from certain other allowances.

  • Under the old IIT system, expats working in China could deduct certain ‘allowances’ before calculating the tax liability on their monthly salary, including:
  • Housing, meals, and laundry expenses.
  • Relocation expenses upon commencement or cessation of employment in China.
  • Reasonable business travel expenses.
  • Reasonable expenses for personal trips of home visiting.
  • Reasonable allowances for language training and children’s education.

According to the Notice on Issues Relating to Transition of Preferential Policies, foreigners can still apply for these allowances for another three years, between January 1, 2019 and December 31, 2021.

However, foreigners need to choose between the tax-exempt allowances or the six special additional deductions during this three-year transitional period. Once decided, the preference cannot be changed within a given tax year.

The tax-exempt allowance policy is believed to be more beneficial to expats with a higher income and level of expense. This policy is based on the actual cost of each expenditure, and subject to the limit of a ‘reasonable’ proportion (generally around 30 percent) of the expat’s monthly salary.

However, to enjoy this policy, expats are required to provide corresponding invoices or receipts every month for each expense, which is not easy in all circumstances. Further, the tax authorities have discretion on whether to grant expats these tax-exempt allowances.

Previously, expats could reset the five years tax clock by leaving China for over 90 days cumulatively,

This article was first published by China Briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in in ChinaHong KongVietnamSingaporeIndia, and Russia. Readers may write info@dezshira.com for more support.