Determining your tax residency status in China is a critical part of knowing your tax obligations under Chinese law. There are some instances when as a taxpayer, you will have a different tax rule to follow when you do work or business out of China for a certain period. International executives, for example, may have to adhere to a particular rule or standard when paying for their taxes in China.
Have a look at our previous article on International Executives Income Taxation in China
Since January 1, 2019, the tax residency regulation in China had been relaxed from its previous version. Read below to learn more about the tax residency status in China.
New regulation for determining tax residency
A taxpayer’s domicile status is an important aspect of determining tax obligation. For the most part, foreigners will have to be considered without a domicile status in China. According to the new rule on individual income tax (IIT), a non-domiciled individual will pay personal income tax if he or she has lived in China for a cumulative period of 183 days. The income tax will be deducted from the taxpayer’s China-sourced income. However, if no single departure is made within the tax year, the taxpayer may have to also pay tax for income derived overseas.
Read more about Foreigners in China: How to Qualify for a Tax Exemption
What is domicile status?
It is the habitual residence in China (or any country) due to:
- Domiciliary or household registration (i.e., if there is the intention of permanent residency)
- Family ties
- Economic interests
- Prolonged travel
What is taxable income?
A resident individual may be taxable on “income obtained from within and outside China”. That is to say both incomes derived from businesses, transactions, dealings, etc. from within China as well as from other countries may be taxed in China. However, there are sources of income, whether the place of payment is within China or not, shall be taxed in China:
- Income acquired as a result of providing services within China;
- Proceeds obtained from the leasing of property to lessee/s for use within China;
- Proceeds from licensing the use of various concessions within China; and
- Other passive income namely interests, dividends, and dividends obtained from enterprises, institutions, other organizations, and individual residents within China.
Moreover, as stipulated in the IIT Law, the scope of an individual’s income from China may include:
- Wages, salaries, bonuses, year-end salary increases, labor dividends, allowances, subsidies, and other income related to employment or employment of an individual (“Income form wages and salaries”);
- Income from the performance of services such as labor in the form of design, decoration, installation, drawing, testing, medical treatment, law, accounting, consulting, lecturing, translating, review, painting, sculpting, film, and television directing, exhibition, technical services, referral services, brokerage services, agency services, etc. (“Remuneration from the performance of services”)
- Income obtained as a result of the publication of works such as books, newspapers, etc. (“Remuneration for manuscripts”)
- Income from patent rights, trademarks, copyrights, non-patented technologies, and other royalties (“Income from royalties”)
- Income from sole proprietorship enterprises or partnerships and their production and business activities, school directing, medical treatment, counseling, contracting and subcontracting, letting and subletting enterprises, and other production and business activities (“Income from operations”)
- Income from dividends and interests from claims, equity, etc. (“Income from interests and dividends”)
- Income from the rental of real estate, machinery and equipment, cars, boats, and other properties (“income from leased property”)
- Income from the transfer of marketable securities, equity, shares in partnerships, real estate, machinery and equipment, as well as vehicles, ships, and other properties (“Income from transfer of property”)
- Personal winnings and other incidental gains (“Accidental income”)
It is also stipulated therein that other forms of income may not be defined specifically by the law. However, the competent tax department/s under the State Council will determine it to be able to include that particular form of income gained. For more information on this law, read here.
What are the conditions for 183 days of stay in China?
183 days basically is half of the year (365 or 366 days divided by 2). The idea behind this suggests that staying in China for more than half of the year will make you a resident of China for tax purposes and liable to pay personal income tax. This applies to individuals who:
- Have domicile in China; or
- Without domicile but have resided for more than 183 days in China
If the individual does not have domicile and does not reside in China, or has resided in China for less than 183 days in a year (January 1 to December 31) and has no domicile shall be considered a non-resident individual. However, the rules are more relaxed because of the stipulations that will be explained below.
New six-year tax residency rule
As clarified by the State Taxation Administration, the starting point to determine the tax status of a foreign worker will be in accordance with the “six-year rule”. If a foreign worker resides in China for six consecutive (successive) years without leaving China, he or she will be subject to taxation on their income from anywhere in the world. Previously, the rule applied for only five years of stay. Now, it is extended to six years which means foreigners will have another year not to pay tax on their overseas income, given that they have a single departure for 30 days.
All years spent in China before January 1, 2019, will not be included in the calculation. In other words, since the implementation of the new regulation, the six-year count has been restarted, only those who will have stayed in China for six consecutive years by 2024 tax filing season will be subject to income tax on all income sources.
Unlike the previous rule, this time, taxpayers may be able to automatically enjoy the tax benefits at the point of filing (i.e., no longer need the approval from local tax authorities).
Restarting the “clock”
Does “six consecutive years” literally mean you can leave China for a day and restart the six-year rule? NO.
- 30 days – if there is a single departure outside of mainland China consisting of more than 30 uninterrupted (literally) days, the clock to six years CAN be restarted
- 183 days – consider the six years as six 183-day-years. Since the start of 2019, a foreign worker is considered to have spent “a year” in China if the individual stays in China for at least 183 days within a given year (January 1 to December 31)
- 24 hours – only full 24-hour- days are counted here. If a person is in Hong Kong from 8 am on Monday and goes to Shanghai at 5 pm on Friday in a given week, then only Tuesday, Wednesday, and Thursday (only 3 days) will be counted.
1. Suppose an individual, L, a Hong Kong resident who works in Shanghai, comes to Shanghai every Monday morning and returns to Hong Kong on Friday evening. Monday and Friday are less than 24 hours within mainland China, so these are not counted in the number of days, and therefore, L stays in China for a total of 3 days each week. If computed annually:
52 weeks in a year * 3 days a week = 156 days; Therefore, L does not count as a tax resident in China. Only his income from within China will be counted for income tax purposes (in mainland China).
2. For example, M, a foreign worker, came to Shanghai to work from January 1, 2013, until August 30, 2026. For the most part, M stayed in mainland China and only went on vacation outside the country from February 1 to March 15, 2024.
As mentioned above all prior years from January 1, 2019, are not counted in the six-year rule. Therefore, based on the six-year rule, M has lived in China from 2019 to 2024. However, his income from outside China will still not be included and the six-year clock will have been restarted because he left mainland China for more than 30 uninterrupted days. Therefore, M would have to count another uninterrupted six-year before his worldwide income can be subject to personal income taxation in mainland China.
Determining tax residency may be complicated at first glance. However, given the restrictions of 2020 due to the virus, perhaps we are given a few months (or years) to figure things out before being subject to the stipulations of the new tax residency rule. Given the right materials and information, preparing and filing taxes in China (or anywhere in the world) might become easier.
S.J. Grand provides advisory and support on tax and accountancy services for foreign-invested companies in China including income tax filing and declaration for foreign employees. We also assist foreign companies on tax optimization strategies to take advantage of China’s various preferential policies. Contact us to get you started.
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