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China - Income Tax

Taxation of international executives

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Annual tax returns and compliance

When are tax returns due? That is, what is the tax return due date?

Monthly individual income tax returns are due by the 15th of the following month (but see discussion on compliance requirements).

Annual individual income tax returns should be performed between 1 March and 30 June of the following year if certain conditions are met.

What is the tax year-end?

31 December.

What are the compliance requirements for tax returns in China?

Monthly returns

Employer’s monthly individual income tax withholding returns are required to be filed on a monthly basis and the tax payments settled by the 15th day of the month following the date of receipt of income. The same monthly filing requirement and due date applies for individuals who receive employment income but have no withholding agent in China. Such individuals must file an individual income tax return on a self-declaration basis.

Annual returns

Effective from 1 January 2019, China resident individuals should perform an annual reconciliation filing between 1 March and 30 June following the end of the respective tax year, if certain conditions are met.

Tax rates

What are the current income tax rates for residents and non-residents in China?

Residents

For comprehensive income (including employment income, income from independent personal services, author’s remuneration, and royalties), the rates applicable for annual taxable income are as follows:

 (A) Taxable income (B) Taxable income subject to gross up Tax rate Quick deduction In excess of RMB To RMB In excess of RMB To RMB Percent RMB 0 36,000 0 34,920 3 0 36,000.01 144,000 34,920.01 132,120 10 2,520 144,000.01 300,000 132,120.01 256,920 20 16,920 300,000.01 420,000 256,920.01 346,920 25 31,920 420,000.01 660,000 346,920.01 514,920 30 52,920 660,000.01 960,000 514,920.01 709,920 35 85,920 960,000.01 Over 709,920.01 Over 45 181,920

If tax is borne by the employee, figures in Column A should be applied to calculate the tax as follows:

Tax liability = Taxable income x applicable tax rate – quick deduction.

If tax is borne by the employer, tax should be calculated on a gross-up basis as follows:

Grossed-up taxable income = (Taxable income subject to gross up – quick deduction B) / (100 percent - applicable tax rate B)

Tax liability= Grossed-up taxable income x applicable tax rate A – quick deduction A.

Non-residents

For comprehensive income, the rates applicable for monthly taxable income are as follows:

 (A)Taxable income (B) Taxable income subject to gross up Tax rate Quick deduction In excess of RMB To RMB In excess of RMB To RMB Percent RMB 0 3,000 0 2,910 3 0 3,000.01 12,000 2,910.01 11,010 10 210 12,000.01 25,000 11,010.01 21,410 20 1,410 25,000.01 35,000 21,410.01 28,910 25 2,660 35,000.01 55,000 28,910.01 42,910 30 4,410 55,000.01 80,000 42,910.01 59,160 35 7,160 80,000.01 Over 59,160.01 Over 45 15,160

If tax is borne by the employee, figures in Column A should be applied to calculate the tax as follows:

Monthly Tax = Monthly taxable income x applicable tax rate – quick deduction.

If tax is borne by the employer, tax should be calculated on a gross-up basis as follows:

Grossed-up monthly taxable income = (Monthly taxable income subject to gross up – quick deduction B) / (100 percent - applicable tax rate B)

Monthly tax = Grossed-up monthly taxable income x applicable tax rate A – quick deduction A.

Residence rules

For the purposes of taxation, how is an individual defined as a resident of China?

Domicile

An individual is domiciled in China if they habitually reside in China by reason of permanent registered address, family ties, or economic interests. An individual with a Chinese passport or a hukou (household registration) is generally regarded as being domiciled in China.

Non-domicile

Generally, a foreign national is treated as a non-domicile of China.

A non-domiciled individual of the PRC is taxed in accordance with their length of residence in the PRC. Under the revised PRC IIT laws and regulations effective 1 January 2019, the non-domiciled individual would be deemed to be a resident of the PRC if they reside in the PRC for 183 days or more during a calendar year.

Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country/jurisdiction for more than 10 days after their assignment is over and they repatriate.

No. Whether an individual is resident of China will generally depends on the number of days of residence.

What if the assignee enters the country/jurisdiction before their assignment begins?

Generally, an individual who holds a position in China will be liable for tax from the first day of employment in China. In some locations, the local tax authorities would treat the day of arrival in China as the first day of employment if it is earlier than the official assignment start date.

Termination of PRC assignment

Are there any tax compliance requirements when leaving China?

For non-domiciles, all outstanding taxes should be settled and individual income tax deregistration should be completed at the local tax authorities by the due date of the monthly tax filing following the last day of employment.

The employing entity in China should arrange for cancellation of the work and residence permits of non-domiciles upon termination of their employment in China.

What if the assignee comes back for a trip after residency has terminated?

Tax may be payable based on the days of presence in China.

Communication between immigration and taxation authorities

Do the immigration authorities in China provide information to the local taxation authorities regarding when a person enters or leaves China?

Information sharing between the authorities could occur.

Will an assignee have a filing requirement in the host country/jurisdiction after they leave the country/jurisdiction and repatriate?

Yes. The assignee could have a filing requirement on China-sourced income received after repatriation.

Do the taxation authorities in China adopt the economic employer approach1 to interpreting Article 15 of the Organization for Economic Cooperation and Development treaty? If no, are the taxation authorities in China considering the adoption of this interpretation of economic employer in the future?

Yes, a Chinese entity may be regarded as economic employer even if no costs are recharged to it.

De minimus number of days

Are there a de minimus number of days2 before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?

No.

What categories are subject to income tax in general situations?

Taxable income includes all compensation received by an employee, including amounts received directly or indirectly from the work performed for the employer. The following list includes typical items of an expatriate compensation package which are taxable in China. Please note that this is not a comprehensive list.

• base salary
• bonuses
• cost-of-living allowances
• equity-based compensation
• employer contribution to overseas social security.

Intra-group statutory directors

Will a non-resident of China who, as part of their employment within a group company, is also appointed as a statutory director (i.e. member of the Board of Directors in a group company situated in China trigger a personal tax liability in China, even though no separate director's fee/remuneration is paid for their duties as a board member?

a)   Will the taxation be triggered irrespective of whether or not the board member is physically present at the board meetings in China?

b)   Will the answer be different if the cost directly or indirectly is charged to/allocated to the company situated in China (i.e. as a general management fee where the duties rendered as a board member is included)?

In the case that a tax liability is triggered, how will the taxable income be determined?

Non-resident individuals are taxed in China on China sourced income only. The IIT treatment for director’s fee may be different according to the individual’s situation (e.g. employment arrangement and duties, etc.). Currently there are no PRC IIT regulations which specify the determination of the source of director’s fee. Therefore we suggest that the taxation of director’s fee is assessed on a case-by-case basis based on the individual’s own specific situation.

Tax-exempt income

Are there any areas of income that are exempt from taxation in China? If so, please provide a general definition of these areas.

See discussion on expatriate concessions.

Are there any concessions made for expatriates in China?

Certain benefits-in-kind provided to foreign national employees individuals are exempt from tax provided that the amounts are reasonable and substantiated by official invoices/receipts and other supporting documentation. These include the following:

• rental of accommodation
• meals and laundry
• relocation
• language training (for the employee only)
• children’s education expenses in China
• Home leave travel (up to two trips a year for the employee only).

Please note that according to the current regulation, the tax-exempt benefits shall be valid until the end of 2021. In addition, foreign employees who are PRC tax residents may elect to either claim tax exemption on such benefits or claim itemized deductions (including mortgage interest or housing rental, children’s tuition, continuing education, serious illness medical fees, and supporting elderly) during 2019 – 2021 if certain conditions are met.

Is salary earned from working abroad taxed in China? If so, how?

Individuals of China domicile and non-domiciles who are long-term residents are liable for tax on worldwide income; therefore such individuals are subject to tax on salary earned from working abroad.

Non-domiciles of China who are resident for less than 6 consecutive years are generally liable for tax on China-sourced employment income only. However, non-domiciles who are full-year residents of China within a calendar year are liable for tax on salary earned from working abroad if such salary is paid by an entity in China.

Are investment income and capital gains taxed in China? If so, how?

Individuals of China domicile and non-domiciles who are long-term residents are liable for to tax on worldwide income, therefore such individuals are liable for tax on investment income regardless of where it is sourced or received.

Non-domiciles of China who are resident for less than 6 consecutive years are generally liable for tax on China-sourced investment income only.

Certain types of investment income are provisionally exempt from tax in China. These are mentioned below.

Dividends, interest, and rental income

Dividends

Dividends are generally taxable at a flat rate of 20 percent. However, dividends paid out by companies listed on the Chinese stock exchanges are taxed at rates ranging from 5 to 20 percent depending on holding period.

Interest

Interest income is generally taxable at a flat rate of 20 percent.

Certain types of interest income, such as interest on bank savings account deposits, State treasury bonds issued by the Ministry of Finance and approved education savings funds, are exempt from tax.

Capital gains

Gains on the transfer of capital assets (such as securities, equity interests, land use rights, buildings, equipment, vehicles, and other assets) are generally taxable at a flat rate of 20 percent.

Gains on the transfer of stocks listed on the Chinese stock exchanges are provisionally exempt from tax.

Gains from stock option exercises

Stock options are generally taxable at exercise. The difference between the fair market price, which is the closing price of the stock on the date of exercise, and the exercise price is recognized as employment income and subject to withholding requirements.

Foreign exchange gains and losses

There is no specific provision in the current tax law and regulations regarding the taxation of foreign exchange gains.

Principal residence gains and losses

Gain on sale of a residence, which has been owned and used by the individual for 5 years or more, is tax-exempt. Loss on such sale is not deductible against taxable income.

Capital losses

Capital losses are not deductible against taxable income.

Personal use items

Gains on the sale of personal use items are taxable as capital gains.

Gifts from employers to employees generally constitute taxable employment income. There is no gift tax in China with respect to gifts between individuals.

Additional capital gains tax (CGT) issues and exceptions

Are there additional capital gains tax (CGT) issues in China? If so, please discuss.

No.

Are there capital gains tax exceptions in China? If so, please discuss.

See discussion on taxation of capital gains.

What are the general deductions from income allowed in China?

For comprehensive income, a monthly personal exemption of RMB5,000/annual personal exemption of RMB60,000 is generally applicable per individual.

Deductions from employment income are also allowed for qualified charitable contributions, subject to limitations, and employee contributions to Chinese social security to the extent mandated by law.

China resident individuals could claim itemized deductions (including mortgage interest or housing rental, children’s tuition, continuing education, serious illness medical fees, and supporting elderly) if certain conditions are met.

Tax reimbursement methods

What are the tax reimbursement methods generally used by employers in China?

Current month gross-up.

Calculation of estimates/prepayments/withholding

How are estimates/prepayments/withholding of tax handled in China? For example, pay-as-you-earn (PAYE), pay-as-you-go (PAYG), and so on.

Pay-as-you-go (PAYG) withholding

Employers are required to withhold taxes from each payment of employment income.

When are estimates/prepayments/withholding of tax due in China? For example: monthly, annually, both, and so on.

Taxes withheld on employment income should be filed and paid monthly.

Is there any relief for foreign taxes in China? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on.

Income tax paid in foreign jurisdictions by individuals on foreign-source income may be credited against the amount of income tax assessed in China where the foreign country/jurisdiction has the first right to tax.

General tax credits

What are the general tax credits that may be claimed in China? Please list below.

No general tax credits available.

Sample tax calculation

This calculation assumes a married taxpayer resident in China with two children whose 3- year assignment begins 1 January 2017 and ends 31 December 2020. The taxpayer’s base salary is 100,000 US Dollars and the calculation covers 4 years.

Exchange rate used for calculation: USD1.00 = RMB6.9

 2017 USD 2018 USD 2019 USD 2020 USD Salary 100,000 100,000 100,000 100,000 Bonus 20,000 20,000 20,000 20,000 Cost-of-living allowance 10,000 10,000 10,000 10,000 Housing allowance 12,000 12,000 12,000 12,000 Company car 6,000 6,000 6,000 6,000 Moving expense reimbursement 20,000 0 20,000 20,000 Home leave 0 5,000 0 0 Education allowance 3,000 3,000 3,000 3000 Interest income from non-local sources 6,000 6,000 6,000 6,000

Exchange rate used for calculation: USD1.00 = RMB6.9.

Other assumptions

• All earned income is attributable to local sources.
• Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
• Interest income is not remitted to China.
• The company car is used for business and private purposes and originally cost USD50,000. The car is leased and paid for directly by the employer.
• The employee is deemed resident throughout the assignment.
• Tax treaties and totalization agreements are ignored for the purpose of this calculation.
• Salary and cost-of-living allowance are paid monthly in equal installments.
• Housing allowance is utilized in full on rental of accommodation in China, with valid tax invoices and lease agreements available for substantiation.
• Home leave costs incurred are for the employee themselves, not exceeding two trips in a calendar year.
• Education allowance is utilized in full on children's education in China, with valid tax invoices available for substantiation.
• Tax is borne by the individual.

Calculation of taxable income

 Year ended 2017 RMB 2018 RMB 2019 RMB 2020 RMB Days in China during year 365 365 365 365 Earned income subject to tax Salary 690,000 690,000 690,000 690,000 Bonus 138,000 138,000 138,000 138,000 Cost-of-living allowance 69,000 69,000 69,000 69,000 Total earned income 897,000 897,000 897,000 897,000 Other income 0 0 0 0 Total income 897,000 897,000 897,000 897,000 Deductions 57,600 58,200 60,000 60,000 Total taxable income 839,400 838,800 837,000 837,000

Calculation of tax liability

 2017 RMB 2018 RMB 2019 RMB 2020 RMB Taxable income as earlier 839,400 838,800 837,000 837,000 Chinese tax thereon 212,925 187,845 172,320 172,320 Less: Domestic tax rebates (dependent spouse rebate) 0 0 0 0 Foreign tax credits 0 0 0 0 Total Chinese tax 212,925 187,845 172,320 172,320

Footnotes

1Certain tax authorities adopt an “economic employer” approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country/jurisdiction for a period of less than 183 days in the fiscal year (or a calendar year of a 12-month period), the employee remains employed by the home country/jurisdiction employer but the employee’s salary and costs are recharged to the host entity, then the host country/jurisdiction tax authority will treat the host entity as being the “economic employer” and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country.

2For example, an employee can be physically present in the country/jurisdiction for up to 60 days before the tax authorities will apply the “economic employer” approach.

Disclaimer

All information contained in this publication is summarized by KPMG Advisory (China) Limited, the China member firm affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity, based on the PRC Individual Income Tax Law (Presidential Decree No. 9) and implementation regulations (State Council Order No. 707); the website of the PRC tax authorities; the website of the PRC social security authorities.

© 2021 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity.  Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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