China: New Tax Rules For Non-Domiciled Individuals In China

Last Updated: 7 May 2019
Article by Brenda Qin

Retroactively effective from 1 January 2019, it's important for Chinese companies and their foreign national employees to understand how they're affected by the latest announcements.

In March 2019, the Ministry of Finance and the State Administration of Taxation of China jointly issued two announcements (no. 34 and 35) providing specific guidance on the Individual Income Tax (IIT) treatments of non-domiciled individuals under the country's new IIT Law. Both announcements are retroactively effective from 1 January 2019.

Here's an overview of the key changes and implications. If you have any questions or need further information on how the rules affect your Chinese company or foreign national employees, get in touch with us.

Days residing in China – new counting method

The tax residency status of a foreign individual (including Hong Kong, Macao and Taiwan citizens) and their IIT liability in mainland China depends on their number of days resident in the country. Announcement 34 clarified the new criteria for determining the number of days a foreign individual has been resident.

  • If a non-domiciled individual is physically present on the mainland for 24 hours in one day, that day counts towards a day of residing in China.
  • If the non-domiciled individual is physically present on the mainland for less than 24 hours in one day, that day is not counted.

The new criteria reduces the number of days that foreign individuals are deemed to reside in China, and will be particularly beneficial for those who frequently travel between China and other countries.

New 'six-year' rule

Non-domiciled individuals in China are considered tax residents if they have resided in the country for 183 days or more in a tax year. China tax residents are generally liable for IIT on their worldwide income. The latest IIT law replaced the 'five-year' IIT concession rule for non-domiciled tax residents' non-China sourced income with a new 'six-year' rule. The following detailed guidance was then provided in announcement 34.

The non-domiciled individual is liable for IIT in China on their worldwide income if they meet both of the following conditions at the same time:

  1. resided in China for 183 days or more in each of the tax years during the period of the 'preceding six years'*
  2. was not physically outside of China in one single trip of more than 30 consecutive days during the period of the 'preceding six years'*.

*The 'preceding six years' refers to the six consecutive years immediately preceding the year of tax assessment, which should be counted as starting from 1 January 2019, regardless of how many years a non-resident individual has resided in China before 2019.

If the non-domiciled individual does not meet the abovementioned conditions simultaneously, his or her non-China sourced income paid by any foreign entity is exempt from IIT provided that the relevant tax filing is completed.

These more lenient rules are a strong sign of the government's intention to attract more foreign talent to China, as they effectively provide all non-domiciled individuals with a tax concession on their non-China sourced income until the year 2024.

Income sourcing rule

Rules to determine the income source for remuneration received by non-domiciled individuals who hold senior positions in a Chinese resident company were provided in announcement 35. It also specifically defines how to calculate the China working days for non-domiciled individuals who hold dual positions inside and outside China, or are solely employed by a foreign employer but need to frequently travel to China.

  • The China working days include actual working days, public holidays, personal leave as well as training days inside and outside China taken during the China working period.
  • If the individual stays in China for less than 24 hours in a day, that day is counted as half of a China working day, eg. the day of arrival and departure or a same-day trip to China.
  • The salaries of non-domiciled individuals eligible for the time apportionment method of IIT computation will have their salaries apportioned based on the number of China/non-China working days.

In general, announcement 35 follows and consolidates the previous IIT rules on income sourcing for non-domiciled individuals while also apportioning the taxable income, which is consistent with international practices and more beneficial for taxpayers.

The same announcement also elaborates on the IIT calculation rules and formulae for non-residents' bonuses and incentive income, and the wages and salaries received by non-domiciled individuals not in senior executive roles, versus those with a senior executive role under different scenarios.

Tax treaty application

Based on the relevant clause of the double tax treaty / arrangement for the avoidance of double taxation, where the non-domiciled individual is resident in another contracting state, the non-domiciled individual can choose to apply the treaty benefits to determine their IIT treatment.

In other words, non-domiciled individuals have the liberty to choose whether to enjoy treaty benefits (if eligible) or domestic China law where the tax treatment is more preferential.

However, the relevant procedural requirements for treaty application are not mentioned in announcement 35. We understand that the existing rules on the documentation and information reporting requirements for the Chinese tax authorities should be followed in order to claim treaty benefits.

IIT collection and administration for non-domiciled Individuals

When a non-domiciled individual performs IIT filing for the first time in a tax year, it's essential to estimate the number of days they've resided in China over the period, as this determines the filing approach. Also taken into account is any backlog IIT adjustment and relevant withholding returns. Here are the rules set out in announcement 35:

  • if a non-domiciled individual is assessed to be a non-resident of China but later becomes a resident after re-assessing the initial estimation, the advance IIT withholding method will remain unchanged in the tax year. The non-domiciled individual will need to perform annual reconciliation filing during the following year's filing period - 1 March to 30 June. If the individual leaves China not expecting to return in the tax year, they should complete the annual reconciliation filing and settle the tax before leaving China.\
  • if a non-domiciled individual is assessed to be a resident individual in China, but then becomes a non-resident due to their actual China presence being shortened, they should report to the tax authorities within 15 days of year-end and re-calculate the IIT liability based on the applicable IIT filing approach. An IIT retroactive adjustment and tax settlement must be made at the same time. The underpaid IIT liability will be settled and no late payment interest imposed if all is completed within the timeframe. The individual can apply for a tax refund in the case of overpayment.
  • if a non-domiciled individual is assessed to reside in China for less than 90 days in a tax year or 183 days in contracting period based on the applicable tax treaty, the individual should report to the tax authority and recalculate IIT liability on the wages and salaries for the previous filing months within 15 days of the month-end in which their actual China days exceed the 90-day/183-day threshold. The underpaid tax will be settled and no interest surcharge imposed within the 15-day timeframe.

Impact

These key changes in IIT rules have a significant impact on the IIT filing for non-domiciled individuals in China. They also increase the difficulty faced by Chinese companies in dealing with IIT compliance issues for their foreign national employees who are frequently travelling to the mainland or are under a dual position arrangement and paying IIT on time apportionment. Companies and foreign nationals should ensure they: 

  • fully understand the new counting method for the number of days ones is resident or working in China
  • effectively monitor the number of days that foreign national employees spend in China, and apply the correct IIT calculation formula and filing approach
  • understand the criteria for determining tax resident status and the applicable conditions for applying a double tax treaty
  • review the monthly IIT already paid in 2019 (based on the old rules) and complete the necessary adjustment filing with tax authorities
  • review any secondment arrangements for international assignees working in China (due to the different IIT calculation methods specified on bonuses and equity incentive income to be applied by residents and non-residents).

Overall, more detailed calculation, analysis and a comprehensive assessment is required for each foreign national employee. As the IIT and Corporate Income Tax (CIT) regulations in China are relatively complex, employers and employees should take into consideration their potential corporate and individual tax burdens when conducting business and working in the country. Professional advice should be sought when and where necessary.

Talk to us

TMF China are the local experts at understanding and complying with all tax law changes. We stay ahead of the latest developments on IIT policies to ensure the filings for our clients are compliant. We also help to estimate employee IIT liabilities and can provide a projection of the next steps involved.

Our team can also assist companies with training programs for foreign national employees. And for ultra and high net-worth individuals, we offer multiple cross-border asset management service options.

Contact us to find out how we can help you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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