China: Domestic Taxation
This page was last updated on 26 July 2019.
The previously rather hazy definitions of ‘resident’ and ‘non-resident’ for tax purposes have been clarified. Individuals who are domiciled in mainland China – or those who are not domiciled but have been resident in mainland China for 183 days or more within the previous calendar year – are deemed tax residents of China and are subject to IIT on their worldwide income. Those who resided in mainland China for less than 183 days are only liable to pay IIT on the China-sourced income.
The law change is likely to have its greatest impact on residents of Hong Kong and Macau and Taiwanese nationals. These individuals may now be liable to pay tax on their worldwide income if they are physically present mainland China for 183 days or more in a calendar year. The existing ‘five-year rule’ on residence has yet to be clarified.
The new law also combines several types of income (from employment, independent personal services, authorship and royalties) into the single category of comprehensive income. Types of remuneration not subsumed under this category include income from business; dividends; interest; property lease, assignment or transfer and contingency income.
Income is defined very broadly, though it excludes interest on bank deposits. Personal allowances are higher for foreign individuals. Tax rates range from 3% to 45% (on annual income over RMB960,000.) A full list of comprehensive income tax rates is given in the table below.
|0 - 36,000||3%|
|36,001 - 144,000||10%|
|144,001 - 300,000||20%|
|300,001 - 420,000||25%|
|420,001 - 660,000||30%|
|660,001 - 960,000||35%|
There is capital gains tax of 20%, and the same rate applies to many types of unearned income. Employers operate a 'PAYE' withholding tax system for tax on salaries. Withholding tax of 10% applies to dividends, interest, royalties and capital gains.
Presently the state, enterprises and individuals each pay a ‘social security fee’ into a social security fund to finance China's social security programmes - including pension insurance, basic medical insurance and unemployment insurance. The funds are administered through provincial budgets, leading to problems as a result of corruption, uneven regional development and migration.
In September 2010, the European Union Chamber of Commerce in China (EUCCC) said that many Foreign Invested Enterprises (FIEs) were experiencing problems obtaining clearance from local bureaus of the State Administration of Foreign Exchange or banks, for reimbursement of expatriate expenses in foreign currency to foreign affiliates, which initially paid the employee expenses.
According to the EUCCC, there is no state-level foreign exchange regulation clarifying that a Chinese company employing a foreigner may reimburse expenses, unless the Chinese company has been recognized as a Multi-National Corporation (MNC) and the conditions for being recognized as an MNC are very stringent.
In the present situation, due to Chinese foreign exchange control, the EUCCC says foreign companies may not be able to charge back employment costs for employees who are expatriated or seconded to work for their Chinese affiliate companies.
When the reimbursement cannot be made, the EUCCC maintains this often generates a tax burden in the foreign company's home country where such expenses may not be deductible. Alternatively, when the reimbursement is effected, a tax burden may occur in China for the foreign company as a result of taxation of the re-invoiced expenses, even though it does not make any profit in this respect.
Tax authorities, say the EUCCC, frequently refuse to issue a tax clearance or exemption certificate, unless enterprise income tax (EIT) and business tax (BT) are paid on the reimbursement of expenses. Moreover, an additional tax burden arises for the Chinese affiliate which cannot deduct social security expenses borne by the employer. The EUCCC says foreign employees are also penalized as all or part of their social security contributions should be included in their Individual Income Tax (IIT) base.
These restrictions put an undue burden on foreign groups and FIEs doing business in China as well as foreign individuals, amounting to discrimination against the employment of foreigners in China, as employment of Chinese nationals is not subject to the same constraints, says the EUCCC, which recommends:
- The issuance of state-level foreign exchange regulations allowing Chinese companies to reimburse employee expenses paid by foreign affiliates and related to foreign employees working for Chinese affiliated companies;
- The clarification that foreign companies are not liable to EIT and BT on employee expenses charged back without any margin or profit to their Chinese affiliates and corresponding to foreign employees working for the said Chinese affiliates;
- Permission for deduction from the EIT base of social security expenses borne by the employer for foreign employees, irrespective of their nature (i.e. including mandatory and voluntary contributions as well as commercial insurance premiums);
- Exemption of social security contributions from IIT for foreigners working in China, irrespective of their nature (i.e. including mandatory and voluntary contributions as well as commercial insurance premiums) and irrespective of whether such contributions are paid by the employer or the employee.