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  • Service: Tax, Global Mobility Services
  • Type: Regulatory update, Survey report
  • Date: 5/1/2013

China - Income Tax 

Taxation of international executives
Annual tax returns and compliance
Tax rates
Residence rules
Termination of PRC assignment
Economic employer approach
Types of taxable compensation
Tax-exempt income
Expatriate concessions
Salary earned from working abroad
Taxation of investment income and capital gains
Additional capital gains tax (CGT) issues and exceptions
General deductions from income
Tax reimbursement methods
Calculation of estimates/prepayments/withholding
Relief for foreign taxes
General tax credits
Sample tax calculation


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 are due by 31 March of the following year.


What is the tax year-end?


31 December.


What are the compliance requirements for tax returns in China?


Monthly returns


For employment income, employers must file individual income tax withholding returns on a monthly basis and settle the tax payments by the 15th day of the month following the date of receipt of income. In practice, the due dates may be extended in certain locations. 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


Beginning calendar year 2006, individuals of China domicile and non-domiciles who were full-year resident in China during the calendar year with annual income exceeding RMB120,000 are required to file annual individual income tax returns on self-declaration basis. Individuals have the legal obligation to file even if taxes have been duly withheld and paid on a monthly basis such that there is no additional tax liability accrued on the annual return.


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Tax rates

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


Residents


For employment 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

1,500

0

1,455

3

0

1,500

4,500

1,455

4,155

10

105

4,500

9,000

4,155

7,755

20

555

9,000

35,000

7,755

27,255

25

1,005

35,000

55,000

27,255

41,255

30

2,755

55,000

80,000

41,255

57,505

35

5,505

80,000

Over

57,505

Over

45

13,505


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.


Non-residents


Non-residents are generally subject to the same tax rates as residents.


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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 he/she habitually resides in China by reason of his/her 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-domicile of China is deemed to be a resident for any year that he/she lives in China for 365 days, without a single period of absence of more than 30 days consecutively or cumulative periods of absence of more than 90 days within the same 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 for more than 10 days after their assignment is over and they repatriate.


No. Whether an individual is resident of China will generally depend on the number of days of physical presence.


What if the assignee enters the country 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.


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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.


Filing requirements


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


Yes. The assignee could have a filing requirement on China-sourced income received after repatriation. The assignee could also have a filing requirement for the annual return even if there is no additional China-sourced income to be declared after repatriation.


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Economic employer approach1

Do the taxation authorities in China adopt the economic employer approach to interpreting Article 15 of the OECD 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 days2


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


No.


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Types of taxable compensation

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
  • expatriate premiums
  • cost-of-living allowances
  • mobility premiums
  • equity-based compensation
  • employer contribution to overseas social security.

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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.


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Expatriate concessions

Are there any concessions made for expatriates in China?


Certain benefits-in-kind provided 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).

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Salary earned from working abroad

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 five 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.


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Taxation of investment income and capital gains

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 five 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 five 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


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


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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.


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General deductions from income

What are the general deductions from income allowed in China?


For employment income, a monthly personal exemption of RMB3,500 is generally applicable per individual. Individuals of China domicile working outside China and foreign national employees working in China are allowed an increased personal exemption of RMB4,800.


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.


Notably, no relief, exemptions or credits are available for spouse and/or dependents, as taxpayers are assessed on an individual basis.


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Tax reimbursement methods

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


Current month gross-up.


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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.


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Relief for foreign taxes

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 has the first right to tax.


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General tax credits

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


No general tax credits available.


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Sample tax calculation

This calculation assumes a married taxpayer resident in China with two children whose three-year assignment begins 1 January 2012 and ends 31 December 2014. The taxpayer’s base salary is USD100,000 and the calculation covers three years.


2012
USD
2013
USD
2014
USD
Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Housing allowance 12,000 12,000 12,000
Company car 6,000 6,000 6,000
Moving expense reimbursement 20,000 0 20,000
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Interest income from non-local sources 6,000 6,000 6,000

Exchange rate used for calculation: USD1.00 = RMB6.2.


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.
  • Valid tax invoices are available to substantiate the moving expense reimbursements.
  • Home leave costs incurred are for the employee himself/herself, not exceeding two trips in 2011.
  • 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 2012
RMB
2013
RMB
2014
RMB
Days in China during year 366 365 365
Earned income subject to income tax
Salary 620,000 620,000 620,000
Bonus 124,000 124,000 124,000
Cost-of-living allowance 62,000 62,000 62,000
Total earned income 806,000 806,000 806,000
Other income 0 0 0
Total income 806,000 806,000 806,000
Deductions 57,600 57,600 57,600
Total taxable income 748,400 748,400 748,400

Calculation of tax liability


2011
RMB
2012
RMB
2013
RMB
Taxable income as earlier 748,400 748,400 748,400
Chinese tax thereon 184,255 184,255 184,255
Less:
Domestic tax rebates (dependent spouse rebate) 0 0 0
Foreign tax credits 0 0 0
Total Chinese tax 184,255 184,255 184,255



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 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 employer but the employee’s salary and costs are recharged to the host entity, then the host country 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 for up to 60 days before the tax authorities will apply the “economic employer” approach.




© 2013 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 wth KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

 

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Taxation of international executives