This is a thought leadership article by Sino Corporate discussing the misconceptions around tax residency in China.
China’s new Individual Income Tax Law (the New Law) lowers the bar for Chinese tax residency from 1 year to 183 days. Implications of tax residenceareoften misunderstood. The first annual individual income tax (IIT)filing after the introduction of the New Law was completed by the end of June 2020. The following are key takeaways from our handling of expatriates’ annual filings.
1. Taxation of Worldwide Income
Taxation of worldwide income is triggered only when an expat has been a Chinese tax resident for 6 consecutive years starting from 2019, has never been away from China in a single leave of over 30 days during this 6-year period, and has lived in China for 183 days more in the 7th year. The most convenient way to avoid worldwide taxation is to take one big holiday of more than 30 days away from mainland China in any one of a 6-year period.
Our 2019 annual filing has confirmed this, and none of our expat clients was asked to pay tax on income sourced outside China, such as overseas dividends, overseas capital gains, overseas rental income.
2. Time Apportionment
Another misconception surrounding tax residency is that a non-resident can calculate China-sourced income on the basis of his or her residency days in China while a resident is not allowed to do so. Actually, time apportionment is applicable only when an expat works solely for an overseas entity or both for a Chinese entity and an overseas entity.
We filed the annual returns for around 30 expats who were Chinese tax residents in 2019 and who were employed solely by a foreign entity and worked for a Chinesepermanent establishment (PE) of this entity. We selected the time apportionment method from the official filing system for both monthly and annual filings to divide salaries into China sourced income and non-China sourced income. No tax official has challenged us, though all the expats involved were Chinese tax residents in 2019.
3. Tax Burden
It is widely believed that a non-resident pays more tax than a resident does. This might be true under certain conditions prior to 2019, but the opposite can be true now if certain conditions are met, especially when expats are working for Chinese PEs of foreign entities.
All of the 30 or so expats mentioned above were entitled to a tax refund, because they all overpaid when they filed their income tax as non-tax residents. Actually, the closer their Chinese residence was to the 183-day threshold, the higher percentage of tax paid was refunded. And some of the expats not eligible for the refund 2 | P a g e
would have received large amounts of refund if they had chosen to spend a few more days as holiday in China and had therefore become Chinese residents in 2019.
Chinese tax residency does not necessarily mean taxation of both China-sourced income and non-China sourced income. Chinese tax residency does not necessarily lead to higher tax burden, as was always the case under the old law.
Sino Corporate Services Limited
Sino Group is a high-quality provider of fund, trust and corporate services located in Hong Kong, China and Singapore. Our expertise and focus is the Greater China market but our strong relationships in the other major financial centres of Asia enable us to provide a seamless service to clients operating throughout the region. Our team has over 30 years’ experience and has been advising clients on China business since the early 90’s. We are dedicated to meeting our client’s needs whilst maintaining the highest standard of corporate governance. All of our staff are professional and highly-trained to ensure that Sino always acts with integrity and in the best interests of our clients.Learn more