Factors That Determine Foreigners’ Individual Income Tax in China
In China, individuals are subject to individual income tax (“IIT”) pursuant to the Individual Income Tax Law, Implementation Regulations for the Individual Income Tax Law, together with numerous tax circulars issued by various levels of the PRC tax administration. In general, the IIT is levied on the worldwide income of individuals who have a domicile in China or resident in China for at least one year, and on the China sourced income of individuals who have resided in China for less than one year.
To determine whether a foreign individual working in China is subject to IIT, it is necessary to look at what is the source of his or her income, how much time he or she has spent in China, and where his or her employer is based.
China sourced income
According to Notice of the State Administration of Taxation on Questions concerning the Obligation to Pay Tax on Income Derived from Wages and Salaries by Individuals without Residence within the Territory of China (國家稅務總局關於在中國境內無住所的個人取得工資薪金所得納稅義務問題的通知) (the “Notice”), wages and salaries derived by an individual during his or her actual working period within the territory of China will be regarded as income derived from sources within the territory of China regardless of whether the enterprise or individual employer which makes the payments is situated inside or outside the territory of China. Therefore, the source of income is determined by the place where the services were provided, rather than where the contract was executed or where the salary is paid.
Foreign Individuals Residing in China for Less than 90/183 Days in a Tax Year
In accordance with the Notice, a non-resident individual who has worked in China continuously or cumulatively for less than 90 days in a tax year only has to pay IIT on income for work done in China and for which the salary is paid by Chinese domestic institutions, entities or individuals. IIT on income derived from working outside of China or paid by a foreign employer outside of China will be exempt. If there is a double taxation agreement (“DTA”) in place between a foreign country and China, the 90-day limit may be extended to 183 days, depending on the relevant DTA.
Foreign Individuals Residing in China for More than 183 Days but Less than One Year
According to the Notice, individual who has resided in China for more than 183 days but less than one year during the tax year is subject to IIT on all China-sourced income, including income paid by both Chinese and overseas entities for his/her work in China. The foreign-sourced income, i.e. income earned while working overseas, is not subject to IIT.
Foreign Individuals Residing in China for More than One Year but Less than Five Years
Pursuant to the Notice, an individual’s period of residency in China is calculated based on the calendar year, excepting temporary absences from the country of up to 30 days continuously or 90 days cumulatively – which are not counted toward the individual’s stay in China. A foreign individual who is deemed to have resided in China for more than one year but less than five years must pay IIT for income received from both Chinese and foreign employers for work conducted in China and also for income paid by Chinese employers during any temporary absences from the country. Income obtained from foreign employers for work done during a temporary absence is not taxable.
Foreign Individuals Residing in China for More than Five Years Consecutively
A foreign individual who has resided in China for more than five years continuously may face new IIT liabilities identical to those of a resident individual of China, depending on the duration of his/her residency in China starting from the sixth year. The five-year threshold will be reset if the individual resides in China for less than 90 days in any single tax year starting from the sixth year, in which case he or she only has to pay IIT on income for work done in China and for which the salary is paid by Chinese domestic institutions, entities or individuals for that tax year.