Factors such as the type of legal entity the employee is working for along with the position the employee holds influences tax liability. This guide gives a short overview on the Chinese individual income tax regime with a focus on the taxation of the income of foreign employees and how it is applied in Shanghai and Beijing at the time of writing. Note that there is no uniformity throughout the country on how individual income tax is applied; there are significant differences even between cities such as Beijing, Shanghai, and Guangzhou. In general, China adopts a tax withholding system, whereby the employer deducts relevant payment from the employees’ monthly salary and pays the local tax bureaus on behalf of the employees.
5.1: Local employees
5.2: Foreign employees
5.3: Annual Income Tax Filing
5.4: Annual Income Tax Filing Procedures
5.5: Liabilities for non-payment of tax
5.6: Repatriation of Salary Paid in RMB in China
5.1: Local employees
Individual Income Tax
Local employees are taxed on the basis of the balance of their monthly income after deducting their social benefits contribution, a standard deduction of RMB 3,500 and then applying the progressive tax rate as shown in the table on the right. The employer is obliged to withhold the full tax amount and submit the taxes to the appropriate Chinese authorities on behalf of its employees.
Taxable Income = Gross Salary – Social Benefits – ¥3,500
IIT = Taxable Income x Tax Rate – Quick Deduction
Net Salary = Gross Salary – Social Benefits – IIT
A detailed sample calculation of employee’s social benefits, income tax and net salary can be found in the downloadable pdf version of this handbook
|
Taxable Income |
Tax Rate |
Quick Deduction |
|
Less than 1,500 |
3% |
0 |
|
1,501 - 4,500 |
10% |
105 |
|
4,501 - 9,000 |
20% |
555 |
|
9,001 - 35,000 |
25% |
1,005 |
|
35,001 - 55,000 |
30% |
2,755 |
|
55,001 - 80,000 |
35% |
5,505 |
|
Over 80,000 |
45% |
13,505 |
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5.2: Foreign employees
The incomes of foreign employees in China are taxed by the same progressive tax rates as incomes of Chinese employees. However the important question is, when foreign nationals’ incomes are subject to Chinese individual income tax liabilities.
Tax Liability
The criterion used to determine a foreign employee taxes liability in China is the duration of stay. Another distinction has to be made between junior staff and senior executives. Foreigners and Chinese from Hong Kong, Macao and Taiwan have to pay IIT on incomes derived from Chinese sources for work in China if they have lived in the country for less than 90 days (183 days for citizens of countries that have signed a treaty on the avoidance of double taxation with China[1]). If a foreign employee has been living in China for more than 90 days (183 days) but less than a year, income for work in China from all sources is taxable. Foreign senior executives (e.g. CEO’s, General Managers, Chief Representatives, etc.) however, are liable for their full income derived from Chinese sources from the first day in the country. For better understanding taxable income for longer periods of stay and for senior officials compared to ordinary employees please see the chart below.
However, one special situation needs to be mentioned: The salary of a Chief Representative (of a representative office), which is issued by the parent company abroad is taxed on a prorated basis even for durations of stay of less than 90/183 days per year. The Chief Representative must apply for part-time status, which allows him to pay taxes on his income from abroad only for the time spent in China. This rule does not apply for senior officials of WFOE’s, because these are registered as Chinese companies and pay their employees from within China.
[1] These include among others: the EU-25 (except Greece), Australia, Brazil, Canada, Hong Kong, India, Indonesia, Japan, Macao, Malaysia, New Zealand, Norway, Russia, Singapore, South Africa, South Korea, Switzerland, Thailand, USA, Vietnam
Registration Procedures
If the employee is liable for China tax filing, the following procedures for registration apply and the following documents are required:
- Original salary certificate from overseas employer
- Copy of employment contract
- Copy of all pages of passport
- If the employer is a “permanent establishment” in China then: employee’s work permit, employer’s tax registration certificate and employer’s business license.
Tax Calculation
After knowing which incomes are subject to Chinese IIT, the calculation process is only slightly different from the one described for Chinese nationals. The same tax rates and tax brackets also apply for the incomes for expatriates working in China or for Chinese companies. Foreign employees may, however, deduct an amount of 4,800 RMB before calculating the tax payable according to the scheme above. Moreover, some allowances paid by the employer are not taxable[2].
[2] This includes allowances for home leave (only applicable twice a year), language training, children’s education, housing rental, moving, food, washing of clothes and business trip expenses.
Example:
|
Gross Salary (RMB) |
Taxable Income (-4,800) |
Tax Level |
Tax Rate |
Quick Deduction |
Tax Payable |
Net Salary (RMB) |
|
8,500 |
3,700 |
3 |
15% |
125 |
430 |
8,070 |
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5.3: Annual Income Tax Filing
IIT self-declaration in China is intended to cultivate the individual taxpayers’ consciousness of their tax responsibilities. China’s tax regulations require taxpayers who fall under any of the following five categories to self-declare their annual income:
(1) With annual income of RMB120,000 or more;
(2) Receiving salary and remuneration from two or more employers in China;
(3) Generating income abroad;
(4) Generating taxable income without withholding agent;
(5) Other cases as specified by the State Council.
For Scenario (1), tax payers are to declare taxes to relevant authorities within three months after the end of a tax year (i.e. between Jan 1st to March 31st each year). For Scenario (2) to (4), they shall perform tax declaration upon receipt of the income.
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5.4: Annual Income Tax Filing Procedures
Several possible modes of tax declaration include online, mail or directly to the local tax authorities. Tax payers may also entrust intermediary agencies or other persons qualified for tax agency service with their tax declarations.
When computing the annual income, the individual must take into consideration the following 11 components:
- salary and compensation
- income from production and operation by individually-owned business
- income from contact operation and operation under lease of enterprises or social service providers partly or wholly funded by state assets
- compensation for labor services
- author’s remuneration
- royalty
- interest, dividend and bonus
- income from lease of property
- income from transfer of property
- incidental income
- other income specified by finance department under the State Council
As shown in the examples in the earlier sections, taxpayers are allowed deductions from their taxable income, such as social insurance contributions and a general deduction amount of RMB 2,000 for locals and RMB 4,800 for foreigners. Furthermore, the regulations also allow certain tax exemptions, such as particular rewards in respect to science, education, technology, and culture; interest of treasury and financial bonds issued by China; specific academic subsidies or allowances; welfare and relief for the disabled.
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5.5: Liabilities for non-payment of tax
If an individual fails to declare his or her taxes within the specified three-month period, the local authorities may provide an extended deadline but may also impose a penalty for late payment. If the taxpayer fails to make a tax declaration again, or fails to pay or underpays the tax payable, the taxpayer will be held liable for the amount of tax payable along with a possible surcharge.
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5.6: Repatriation of Salary Paid in RMB in China
Foreign employees may repatriate their total monthly net salary back to their home country. In order to convert their RMB salary into foreign currency, they will need to present to their local bank proof of tax payment, their Alien Employment Permit, proof of income as well as other documents required by the bank.
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