China Releases New Law for Foreigners Living in China

Beginning January 1, 2019, an individual who resides in China for 183-days or more will be considered a tax resident and be liable to PRC IIT on their global income.

The amendments are set to have a substantial impact on foreigners living in China as it imposes a more stringent test with a lower threshold period as to when a foreigner will be regarded as a tax resident.

This will also allow China’s domestic tax practices to better accord with Double Taxation Agreements (DTAs) made with other countries.

Details surrounding the practical implementation of this rule are yet to be released.

Of the many questions that remain unanswered are – 

• How will China collect IIT from non-domicile expats?

• How will foreigners be able to reclaim tax through DTAs?

• Will the rule hold any implications on an individual’s visa status?
  

It is anticipated that further bylaws will be released by the State Administration of Taxation later this year. Meanwhile, businesses should continuously monitor for new IIT updates and prepare accordingly.

Understanding the 183-Day Residency Rule

Under Article 1 of the IIT Amendments, a ‘tax-resident’ is deemed to be:

A person who has domicile in China, 

or An individual who does not have domicile in China but has resided in the country for (an accumulated) 183 days or more within a tax year (January 1 to December 31).

The new 183-day rule will replace the previous one-year rule, essentially cutting in half the amount of time one has to spend in China to be considered a tax resident.

At the moment, however, it is unclear whether the previous five-year exemption enjoyed by foreigners will still exist under the new IIT law.

That rule stipulated that foreigners could escape tax liability on their global income until they reached the threshold of staying in China for more than five years.

China’s Residency Rule Prior to IIT Reform

The current calculation for IIT liability is dependent on the source of income, how long one has worked in China, and whether or not income is sourced within or outside of China.

Summary of the different categories of the tax liability can be found below.

One to five years

Currently, foreign individuals who stay in China for more than one year but less than five years – are subject to tax on their income sourced within China and their income sourced outside of China (from a Chinese entity or individual).

A full year is defined as 365 days; however, if an individual is absent in a single period of 30 days or less or an aggregate of 90 days or less then this is deemed as a temporary absence and the individual is still deemed a PRC tax resident for the tax year. This is referred to as the ‘one-year-rule’.

Exceeding five years

However, once a foreign individual is domicile in China for more than five years, they will begin to pay taxes on their worldwide income (income sourced within and outside of China – regardless of origin). This is often referred to as the ‘five-year-rule for expatriates.’

The five-year-rule previously contained a well-known loophole whereby foreigners could ‘reset the clock’ and thereby avoid income tax liability by leaving the country for more than 30 consecutive days  or an aggregate of over 90 days.

The amendments in effect will make it harder for expatriates to avoid paying tax on their worldwide income tax liability by removing this loophole.

Source: china-briefing

Do you want to share a good news story? Let us know if you want to tell a story or share some news with us.