Extended business travelers are likely to be taxed on employment income relating to their Chinese workdays.
Liability for income tax
A person’s liability to Chinese tax is determined by the person’s domicile status. For Chinese tax purposes, a person can be a domiciled individual, a non-resident non-domiciled individual, or a resident non-domiciled individual.
A domiciled individual is defined as an individual who, by reason of the individual’s permanent registered address, family, and/or economic interests, habitually resides in China. An individual with a Chinese passport, or a hukou (household registration), is likely to be deemed as domiciled in China.
A non-domiciled individual is taxed in accordance with the individual’s length of residence in China. Such a person would be deemed to be a resident of China for that year if the person has not been physically away from China for more than 30 continuous days, or more than 90 cumulative days, in a calendar year.
A non-domiciled individual who has been a resident of China for 5 years or less is taxed on income sourced in China only. A non-domiciled individual who has been a resident of China for 5 full consecutive years may be taxed on their worldwide income.
A non-resident non-domiciled individual may be subject to tax on income sourced in China if the individual is unable to meet the conditions required for exemption.
Definition of source
Employment income is generally treated as Chinese-sourced compensation where the individual performs the services while physically located in China.
Certain non-resident non-domiciled individuals may be exempt from tax.
Tax trigger points
Under domestic legislation, a non-resident non-domiciled individual is exempt from the requirements to file and pay tax in China if the individual meets all the following conditions.
- The individual is in China for less than 90 days in a calendar year (this time period is extended if there is a double tax treaty between China and the country in which the individual is a tax resident).
- The individual is paid by an employer outside China.
- The individual’s costs are not borne by a permanent establishment (PE) or place of business of the employer in China. The exemption will not apply, however, if the person holds a position in the Chinese entity.
Types of taxable income
Unless a person is taxed on worldwide income, the types of income on which assignees are generally taxed are employment income, Chinese-sourced income, and gains from taxable Chinese assets (such as real estate).
Net taxable income is taxed at graduated rates ranging from 3 percent to 45 percent. The maximum tax rate is currently 45 percent on monthly taxable income over 80,000 Chinese yuan renminbi (CNY).
Liability for social security
Social security taxes may apply to non-domiciled individuals starting 1 July 2011.
Employee compliance obligations
Domiciled individuals and resident non-domiciled individuals with an annual income exceeding CNY120,000 have an obligation to file an annual individual income tax return by 31 March following year end.
Non-domiciled individuals who are taxable in China and without a withholding agent have an obligation to file returns within 15 days of the month following the receipt of income.
Domiciled individuals receiving income from sources outside China have an obligation to file an annual reconciliation return on income sources outside China within 30 days following year end (or 30 days following settlement of tax in the country where income is earned, subject to tax bureau’s approval).
Employer reporting and withholding requirements
The payer of any amount that is income to an individual has an obligation to withhold the individual’s income tax and remit the amount to the tax authorities. Employers have an obligation to withhold the tax on the income paid to its employees, file individual income tax withholding returns, and remit the amount to the tax authorities within 15 days of the month following the payment.
Work permit/visa requirements
Work permit/visa requirements
Double taxation treaties
China has an extensive tax treaty network. In addition to China’s domestic arrangements that provide relief from international double taxation, China has entered into double taxation treaties with many countries to prevent double taxation and to allow cooperation between China and overseas tax authorities in enforcing their respective tax laws.
Permanent establishment implications
There is the potential that a PE could be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has.
Value-added tax (VAT) of up to 17 percent is charged on the supply of goods and the provision of repairs and processing services in China, as well as on the importation of goods into China.
VAT/Business tax may apply on the supply of labor services depending on location of services.
China has a transfer pricing regime. A transfer pricing implication could arise to the extent that the employee is being paid by an entity in one jurisdiction but performing services for the benefit of the entity in another jurisdiction, in other words, a cross-border benefit is being provided. This would also be dependent on the nature and complexity of the services performed.
Local data privacy requirements
China does not currently have an extensive set of data privacy laws.
China has strict exchange control rules. The CNY is not a freely exchangeable currency. There are strict rules within China applying to the conversion of CNY to other currencies, and vice versa.
Non-deductible costs for assignees
Non-deductible costs for assignees may include contributions by an employer to non-Chinese pension funds, benefits-in-kind incurred in China that are not supported by official receipts, and accrued but unpaid costs.