Big IIT relief on foreign expatriates in China

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published on March 26, 2019 | reading time: approx. 3 minutes
 
Chinese tax authority recently published SAT Bulletin [2019] No. 34 and No. 35, which finally provides guidelines on new Chinese Individual Income Tax (“IIT”) treatments for foreign expatriates working in China in terms of several specific matters. Comparing to the old IIT treatments, new IIT Law has generally mitigated the IIT burden of foreign expatriates, as reflected in the following aspects.

  


 

 

Apportion the taxation base of salary income for foreign expatriates taking dual positions or overseas position only

Under the old IIT Law, the applicable marginal tax rate follows the worldwide salary income amount. The Bulletin 35 overturned the old treatment and makes the apportionment on the taxable base directly, which inherits the apportionment logic and furthermore lowers the applicable marginal tax rate. It results in a further relief on tax burden for foreign expatriates. The new apportionment rules are summarized as follows:

 


 

Apportion the taxation base of multi-month bonus - preferential IIT treatments on multi-month bonus and share-based incentive for non-resident taxpayers

Bulletin 35 allows foreign expatriates to calculate taxable basis of multi-month bonus between China- and foreign-sourced income based on working days. The taxation base of multi-bonus income could be apportioned correspondingly following certain rules. Furthermore the multi-month bonus and share incentives received by non-resident taxpayers could be taxed separately from the regular monthly salaries, to be divided by 6 for applicable marginal tax rate determination and tax liability calculation. The change seems more reasonable comparing to the old treatment and may help expatriates to avoid double taxation in certain cases.
 

Exclude the entry- and exit- days from the 183 days

According to Bulletin 34, the day in which a foreign expatriate stays in China for less than 24 hours will not be counted as one day in the 183-days threshold. Therefore a usual entry-/exit-day would not be counted in as the foreign expatriate normally stays a couple of hours outside China in those days.
 

Not to consider the resident records before 2019 for assessment under the Six-year-rule

One of the most eye-catching change is that for all foreign expatriates who are not domiciled in China, six-year-rule counts from the beginning of 2019. For years prior to 2019, in which a foreign expatriate resided in China for one full year or more than 183 days, will be not be considered in the assessment. Even for those who have five-year record under the old IIT Law and already have worldwide income tax payment obligation in China, the six-year-rule would break their worldwide income tax payment obligation starting from 2019, until they reside in China for another six years in which they reside in China for no less than 183 days and without any break of 30 consecutive days outside China therein. That is certainly a good news for those expatriates who have concern on the previous tax status in China.
 

IIT payment obligations are newly differentiated

Furthermore, Bulletin 35 has set out new compliance requirements for foreign expatriates which differentiates the IIT payment obligations according to several residence levels, i.e., less than 90 days, from 90 to 183 days, more than 183 days and with a six-year-record for worldwide income tax payment obligation. Foreign expatriates should estimate their residence levels in China at each beginning of a calendar year and report to in-charge tax authority within a certain time limit when the actual level deviates from the estimated level.
 

Our observation

It is worth to note that Bulletin 35 has taken double tax treaty benefits into consideration when making apportionment on taxation bases, which greatly avoids conflicts between DTA and local legislation. In view of the complexity of the tax calculation and reporting procedures, it is recommended that foreign expatriates and their employers may seek for professional advices for the correctness of the tax calculation to mitigate the compliance risk.
  

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