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Money Matter


Income tax for expatriates in China


Tom, who is a Hong Kong resident, was required to transfer to mainland China as from 1 November 2002 and work for one year for SuperRich, a subsidiary of Rich Ltd which is a Hong Kong registered company. His annual remuneration was set at RMB240,000 payable by SuperRich in China with another HK$120,000 per year to be paid by Rich Ltd in Hong Kong. However, Tom left SuperRich on 31 December 2002 and resumed his previous role with Rich Ltd in Hong Kong. Is he, therefore, subject to individual income tax (IIT) and, if so, how much IIT should he pay in China?

According to the IIT law in China and a tax notice issued by the State Tax Authority on 30 June 1994, which concerns tax issues for individuals with no permanent residence in China, the situation is clear. The salary income earned by a foreign individual during the period of his or her service performed within China is regarded as sourced from China and is subject to IIT.

The tax notice further stipulates that foreigners are exempted from IIT if the following conditions are met:

a) their income is not paid or borne by any mainland entities; and
b) they do not have any official titles or functions in a mainland entity; and
c) they are present in the mainland consecutively or cumulatively for less than 90 days (or 183 days if they are from a country with a double tax treaty agreement with China).

Figure 1 illustrates the general tax principles according to the IIT law and the tax notice.

As Tom stayed and worked in mainland China less than 183 days in 2002, only the income earned and received from SuperRich in China is subject to IIT.

IIT is charged at progressive rates from 5 percent to 45 percent and, in calculating tax liabilities, a local Chinese individual is allowed a flat deduction of RMB800 per month. Under current IIT rules for foreigners, an additional monthly deduction of RMB3,200 is allowed, so the total monthly deduction for a foreigner working in China is RMB4,000. This applies even if less than a complete month is worked.

In determining Tom's tax liabilities in 2002, reference should be made to Figure 2 for the appropriate tax rates.

In order to simplify the calculation, tax officers in China usually apply a quick deduction to determine an individual's tax liabilities and the formula used is as follows:

(monthly income - standard deduction) x effective tax rate = quick deduction

Thus, in 2002, Tom's monthly IIT liability is calculated as follows:

 
RMB
Monthly salary (RMB240,000 / 12)
20,000
Less: monthly deduction
- 4,000
Taxable income after deduction
16,000
Times: Effective tax rate
x 20%
 
3,200
Less: quick deduction
- 375
 
Monthly IIT payable by Tom in 2002
2,825

Figure 1
No. of days stayed in mainland China
Salary paid by
Rich Ltd (HK)
Salary paid by
SuperRich
(China)
Less than 90 or 183 days
E
T and TP
More than 90 or 183 days and less than 1 year
T and TP
T and TP
More than 1 year and less than 5 years
T and TP
F
More than 5 years
F
F
Abbreviations:
E: Exempted from IIT
T: Taxable income
TP: Time proportioned income earned and received in China during the period of performance of services within the territory of China
F: Full amount of salary income earned is taxable during the period of performance of services or term of employment.

Figure 2
Band
Monthly Taxable Income (in RMB)
after standard deduction

Effective Tax
Rate (%)
Quick
Deduction
1
Income of 500 or less
5
0
2
501 to 2,000
10
25
3
2,001 to 5,000
15
125
4
5,001 to 20,000
20
375
5
20,001 to 40,000
25
1,375
6
40,001 to 60,000
30
3,375
7
60,001 to 80,000
35
6,375
8
80,001 to 100,000
40
10,375
9
Above 100,001
45
15,375

Q & A on individual income tax in China
Q1 Who pays individual income tax (IIT) in China?
A1 Employers are required to withhold IIT from employees' wages and salaries and to file tax returns with, and make payment to, the taxation authorities on a monthly basis.

Q2 What if Tom had not left in 2002 but had worked in SuperRich till 31 October 2003?
A2 As Tom would have worked in China for more than 183 days in 2003, his total income received during the 10 months up to the end of October 2003, including income received from Rich Ltd in Hong Kong and SuperRich in China, would be subject to IIT with the monthly IIT liability of RMB5,275.
This would be based on a monthly salary of RMB20,000 plus HKD10,000, calculated as a total of RMB30,600 on the assumption of an HKD to RMB exchange rate of 1:1.06. The standard monthly deduction for a foreigner working in China of RMB4,000 would give a taxable income of RMB26,600 with an effective tax rate of 25 percent. The resulting sum of RMB6,650 would have a quick deduction of RMB1,375 applied giving the monthly liability of RMB 5,275.
With a tax payment notice issued by the China tax authorities, Tom could claim Hong Kong tax exemption for that part of the taxable China income earned and received in both China and Hong Kong.


Taken from Career Times 07 May 2004

(Last review date: 23 August 2013)


Disclaimer: The opinions expressed in this article are those of the contributor.

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