Individual Income Tax (IIT)
General IIT Principles
For individuals to pay tax in China (PRC Tax Resident), they need to be domiciled in China (Chinese national). A Non-PRC tax resident tends to be expatriates working in China, whose IIT is determined by applicability of the tax treaty, length of their stay in the PRC (People’s Republic of China) within a calendar year (or the tax year), as well as if the payroll of the expatriate is borne or deemed as borne by a PRC entity and also the position and nature of duties performed by the expatriate.
An expatriate’s being domiciled in China is defined by being a registered home owner with a personal residence in the PRC and usually or regularly resides in the PRC due to family relationship or business relationship. The individual is liable to pay IIT on his or her worldwide income derived from sources in and out of China.
Income subject to IIT
This consequently depends on the number of days spent in the country and whether the income is paid by an PRC employer or its PRC sourced income and borne or deemed as borne by an establishment in the PRC. For 90 days (or 183days, where treaty applies) or less spent in the PRC, only PRC-sourced income, paid by a PRC employer which is borne or deemed as borne by a PRC entity is subject to IIT. Between 90days (or 183 days where treaty applies) to a year, only PRC-sourced income, irrespective of whom the payment is made by, is subject to IIT. From a year to 5 years, the worldwide income, except the income relates to non-PRC services and is paid or borne by non-PRC entities is subject to IIT. If the stay exceeds 5 years, then the worldwide income is subject to IIT.
These are income derived from PRC sources irrespective of where the payment is made from (in or out of China), including income from services rendered within China, employment (for example; wages, bonuses, allowances, subsidies, stock options and income related to individual’s position), or the performance of a contract, etc. Also, income from leasing of property for use in China, or assignment of properties, for example, buildings, land use rights and more, located within China, as well as income from granting licensing rights for use within China and income from interest paid by companies, other economic organisations or individuals in China.
Tax Calculation Method
The IIT payable can be calculated by the below formula:
IIT Payable = Taxable Income x Applicable Tax rate – Quick Calculation Deduction(QCD)
A quick calculation method is used to simplify the tax calculation. Individual income tax on wages and salaries is payable on a monthly basis. An individual is also entitled to a fixed monthly deduction for expenses (for local staff RMB 3,500 and for expatriate- RMB 4,800).
Planning for Expats
Expatriates can take advantage of the non-taxable benefits and the special tax calculation for bonus, break the five year rule, arrange dual employment where applicable and have offshore service agreement.
Five year rule (to have been residing in China continuously for 5 years)
An individual who has resided in China for 365 days in a calendar year (or tax year) is deemed to have lived in China for a full year. However, absences such as, a (single) temporary absence from China of less than 30days or multiple absences less than a total of 90days with a calendar year, are disregarded for the purposes of calculating the days of residence. Once the rule is established, the 6th year (if full year), the worldwide income will be subject to PRC IIT from the 6th year onwards, however, if the 6th year is not a full year (temporary absence not counted), PRC-sourced income in any particular year would be subject to PRC IIT.
On one hand, breaking the 5 years rule, before the 5 years residence is established, requires the individual to avoid residing in China continuously for 5 full years; therefore, by staying in China for more than 30 days on a single trip or a collective period of more than 90 days in a calendar year, this can be established.
On the other hand, breaking the 5 years rule after the 5 years residence is established requires the individual to reside in China for less than 90 days (or less than 183 days for treaty residents) in any one year from the sixth year.
An individual can take advantage of these benefits, as certain types of reimbursement, i.e. housing reimbursement, meal and laundry expenses, home trip, language courses and education expenses in the PRC, relocation allowance, that are provided to an expatriate (and of reasonable amount), on the reimbursement basis are not taxable.
Special tax calculation method for bonus
For example, the annual bonus for the year 2013 was RMB 80,000, (the amount determining the tax rate and QCD is RMB 80,000 divide by 12 is RMB 6,667), the applicable tax rate is 20% and the QCD (quick calculation deduction) is RMB 555, therefore, the IIT payable is:
RMB 80,000 x 20% – RMB 555 = RMB 15,445
RMB 80,000 multiplied by 20% subtracted by RMB 555 is RMB 15,445.
This method can only be applied once per year. Furthermore, other bonuses are to be combined with wages and other types of employment income for the month, in order to determine the tax rate and calculate the liability.
Offshore service and employment agreement
Service income from a consulting agreement is treated differently from an employment income under current PRC IIT regulation. Expatriates who are not undertaking the 5 years rule have no obligation to report the non-employment income (company to company, or individual to company) sourced outside China to PRC tax authority. This is applicable to the individual where there is existence of offshore duties and where there is certain absence from China.
Commercial insurance benefits may not be taxable if the insurance premium cannot be distinguished in the name of an employee. Professional development allowance may not be taxable if the valid invoices can be presented indicating the expenses are for education or professional training. A cash card is offered to Chinese locals (not 100% cleat) and they can utilize the annual bonus agreement.
If an expatriate is a senior manager, with positions both in a company registered in China and the other out of China, who lives in China for more than 183 days but less than 5 years, works outside China for several days within a month and receives salary separately paid by his PRC and non-PRC employers. Therefore his PRC IIT exemption is the portion of salary paid by his non-PRC employer for his working days outside China (includes working days and public holidays outside China), in relation to his non-PRC position, this is subject to conditions. The 5 years rule is still undergoing discussions.
Mr. A, a foreigner, is appointed as General Manager with a Beijing WFOE and at the same time taking employment position with the Beijing WFOE’s overseas headquarters in the United States. Both positions will be under employment agreements;
Mr. A is expected to spend 40% of his time abroad and the remaining 60% of his time staying within China;
Base sallary for the China onshore position with the Beijing WFOE will be RMB 50,000 and for the offshore position will also be RMB 50,000. This gives Mr. A an income of RMB 100,000 per month.
Social Insurance for Foreigners
The publication of the China Social Security Law (the SS Law) was made in October 2010, which by July 2011, it became effective. In addition, the draft of “Provisional Measures of Participation in Social Insurance by foreign employees in China” (the Provisional Measure) was released for public consultation on the 10th of June 2011, which in effect states that the participation of foreign employees is a mandatory requirement. As of the 6th of September 2011, the finalized Provisional Measure was realised and took effect on the 15th of October 2011. To date, only Beijing has implemented collection of welfare, (central Beijing, outlying regions are less strict and still reviewing procedures).
Who is affected?
Non-Chinese personnel legally employed in China with a working permit, foreigner employment permit, foreign expert permit, foreign correspondent permit and permanent residence certificate for foreigners (Chinese green card).
Type of Employment Relationship
There are two types of employment relationships; they include Local Employment, which consist of foreign personnel who are employed directly by Chinese companies, and Foreign Employment with a China secondment agreement, assigning foreign personnel to work in their Chinese subsidiaries, branch offices or representative office (RO).
Foreign Personnel (F Visa) on travelling basis or on a PE Status (with no attachment to locally registered entity/organisation) are not affected, only foreign personnel who are employed are affected. There are some uncertainties on a few positions, for example, working foreigners who are not formally employed, without these documents, part-time workers, self-employed, freelancer, individual contractor and expatriates working for oil/coal project which is registered in china.
Types of employer
Enterprises including RO or Branch office in China held by a foreign company, or public institution, foundation or law firm, accounting firms, non-governmental organisation and many more, which are properly registered under the domestic laws in China.
The Chinese residents or region signed bilateral, and under the protection of the Totalisation Agreements with China, are relieved from the obligation. At present, Germany (for pension and unemployment) and South Korea (pension) are in the agreement with China, whilst other countries, for example, France, are starting discussions.
Residents from Taiwan, Hong Kong and Macau were originally covered under the measure; however, they were removed from the finalised version. Furthermore, uncertainties arise when there is exemption from the contribution obligation, the Provisional Measure does not apply to Hong Kong, Taiwan and Macau individuals, but subject to a separate set of rules, such as the Circular  No.26 (no implementation guidelines set yet).
Social Insurance covered
This consists of the ‘five insurances’, they are basic; pension and medical insurance, work-related injury insurance, unemployment insurance, and maternity insurance. However, housing funds are not included, but for Chinese personnel it is.
In the “Provisional Measure”, the contribution rates and basis is not specified, as cap salary and the contribution rates vary from place to place. These are still being calculated (also applies to Chinese personnel). The monthly contribution basis is the individual’s actual salary and capped at 3 times more of the average municipal monthly salary of the local place, (this is announced annually by the government), as well as bottomed at 60% of the average municipal salary. In 2014, the combination of employer and employee contribution is around RMB 7,350 (Beijing) and RMB 6,870 (Shanghai) per month.
Officially, a foreigner and a Chinese local are entitled to the same benefits. There are no clarifications on how to claim these benefits or any details of them except for pension. For pension, the individual is allowed to withdraw the contribution, with written application for termination upon departure from China. An individual Contribution account is allowed to be preserved if foreigner is leaving China. In addition, Years of contribution (15years or more) is allowed to be accumulated when the foreigner returns and continues to participate. Furthermore, pension benefits can be claimed at the qualified age (male 60, female 55) however, if the individual is living overseas, documentation proving their physical existence must be provided on an annual basis. In the event of death, the balance of the foreigner’s social security account can be inherited.
Individual Income Tax
There is no formal clarification, so they follow the same rules as is applied to Chinese nationals (for personal contribution, tax is deducted, but employer’s contribution is not taxable (within specified limit)). Presently, it is uncertain if the balance of a foreigner, upon departure, is taxable or not. The obligation arises when employment commence date was after the 15th of October 2011 and for existing foreign employees, between the 1st of July and the 15th of October 2011 (Beijing).
An employer must register foreign employees to the security program, under his/her name, as an individual is not allowed to be registered in their own name. The registration must take place within 30days after applying for a working permit for the foreign employee. A unique and permanent social security number is assigned to the foreign employee as well as a social security card. In Beijing (cities and rural districts), retrospective payments have been implemented, whilst Tianjin is currently reviewing their implementation plans.
Reporting and Payment
The payment system follows the practice applied to Chines nationals. Foreign employees are to pay via withholding system of their employer on or before the 15th of every month. However, actual payments via auto debit are around the 20th of each month. Furthermore, if the employer fails to register their foreign employees, they are subject to a fine equivalent to 1-3times more than the owing social insurance contribution. Those directly responsible for the incompliance may be subject to a fine of RMB500 – RMB3,000. Also, a fine is imposed on late payments or underpayment of contribution (interest charge (0.05% per day) plus fine).
Expatriates aged 46 or over would be short of the 15years of contribution record to enjoy the pension benefits, therefore there are discussions for raising the retirement age (male 65, female 60). It is difficult for expatriates over 60years to obtain a working Visa in China. Expatriates can receive overseas as long as they are still living but no announcement has been made about re foreign currency.
Expatriates are to register with 4 hospitals, it can be any within the list (usually a First class or one closer to your location), as they can claim at any first class, if visited or wherever they have registered. There are 19 first class and traditional facilities in Beijing. The first RMB 1,800 is excluded, and then 70% is taken off of the bill (first class) and 90% (3rd class). For an in-patient, the first RMB 1,300 is excluded. When travelling, expatriates need to get “Emergency” on their receipt, and be at a covered hospital. They would need to pay first and be reimbursed later. A health card, which was issued in Beijing in 2012, is to be obtained. If registered for health welfare, the Beijing Commercial Bank will deposit 2.8% from the payment baseline (under 35, (for example, an expatriate paid base on RMB 17,379 per month, will get 17, 379 per month, will get 17,379*0.028)), 3% (35-45) and 3.5% (over 45) refund in their bank account every month or withdrawal.
There are no announcements at present for expatriates, in terms of Work related injury, maternity and unemployment. A foreigner cannot be unemployed when they have a work visa. In addition, more countries are expected to conclude a totalisation agreement with China. The Impact on foreign employees will be better protection of rights and interests in certain cases, however, for majority of the foreign employees, there will be negative impact from a cash flow perspective and junior expatriate employees become less competitive due to cost consideratiion.
This article was prepared by International Accountants.
This article is intended for general information purposes only and is not intended to provide, and should not be used in lieu of, professional advice. The publisher assumes no liability for readers’ use of the information herein and readers are encouraged to seek professional assistance with regard to specific matters. Any conclusions or opinions are based on the specific facts and circumstances of a particular matter and therefore may not apply in all instances.