Taxation rules for international executives in China may be more complex considering that they may be frequently traveling between countries to oversee company operations. For this reason, it is important to pay more attention to the tax residency rules of the country especially applied when they have outbound travels within the tax year.
Please have a look at our related article: Tax Residency Status in China and Related Rules
Moreover, international executives such as principals, Chief Executive Officers (CEO), Chief Financial Officers (CFO), and other senior leadership positions may have a significantly higher income than that of line employees and some managers. Thus, it might be beneficial to understand their taxable income and what available options they have for tax exemptions.
Taxation for international executives based on residency
Resident status
Chinese tax authorities determine a taxpayer’s residency based on domicile status and length of stay in China. Normally, individuals with a domicile status refer to Chinese local citizens who were born in China and reside in the country due to household registration, family ties, and economic involvement.
Foreigners are typically considered non-domiciled because of their temporary residency in China. If you are non-domiciled and have resided in the country for more than 183 days in total despite constant traveling, you will be considered as a tax resident This means that you have been in China for 183 or more (full 24-hour days) within a taxable year from January 1 to December 31. Another consideration for residency is not leaving China for more than 30 days in any of the previous six years.
Find out more information on Foreigners in China: How to Qualify for a Tax Exemption
International executives with tax residency statutes are taxed annually (as opposed to the previous monthly regulation) on their worldwide income (from all sources). However, they can avail of special expense deductions (专项附加扣除) that may include:
- Parental elderly care
- Children’s education
- Continuing education
- Treatment for serious diseases
- Housing rental
- Housing loan interest
Of course, tax residents are also welcomed to enjoy other allowable deductions like the annual RMB 60,000 tax-free threshold, and other allowable deductible items (such as social insurance contributions, if applicable). If withholding tax is applicable, it may be done so monthly or by the number of times paid under the agent.
Check out the new policy on withholding tax payments on Tax Returns: Filing Deadlines for the Year 2021
Non-resident status
An international executive, or any individual for that matter, who has resided in China for no more than 183 days in a given taxable year, and has left the country for more than 30 days in that same year, or any of the immediately preceding five years shall be exempt from individual income tax for that year, starting from the year when one was outside of China and has paid overseas income tax. Non-residents will only be taxed on their income from China (China-sourced only).
If the non-resident international executive (or any individual for that matter) is present in China for 90 days or less during the taxable year to render services in China for a non-Chinese entity/employer, then the compensation received by that individual is not subject to tax. This happens given that the economic cost of that assignment in China was not shouldered by an entity within China.
The tax treaty with other countries may apply to non-resident individuals and may be exempt from taxation of their China-sourced income during the period within the 183 days (or 12 months on some instances) applicable in China within a taxable year.
Other considerations for international executives
Before the effective date of the revised individual income tax law on January 1, 2019, only income derived in China was subject to individual income tax (IIT) for non-residents. With the new residency status, international executives may now be taxed on their worldwide income if they stayed in China for 183 days instead of one whole year. Moreover, income subject to tax is the individual’s “Comprehensive Income” which is comprised of the following:
- [basic] salary and wages;
- income from providing services;
- author’s remuneration; and
- royalties.
The executives’ comprehensive income would then be subject to a set of progressive tax rates of 3 percent to 45 percent, depending on the bracket to which the taxable income belongs to.
Read more about China Adopts a Revised Individual Income Tax Law
On the other hand, short-term assignments, unless a tax treaty is applicable, cannot be exempt from China-sourced income tax. In general, compensation given for services made in China is a China-sourced income.
Conclusion
International executives are subject to the same tax laws that apply to other foreign individuals. The main difference perhaps is the number of source countries involved in providing for their salaries and the higher bracket of the income tax rate applicable to them.
As the new residency status may be challenging for international executives who often travel in and out of China, it is best to consult a tax professional to have a better grasp of applicable taxes and exemptions.
Contact us
S.J. Grand’s tax and accountancy services will keep your business updated with the various policy changes in China every year and what steps to take to remain compliant with the Chinese income tax regulations. If you want to know your tax conditions under the new residency status, contact us for consultation and assistance.
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