Taxation for international executives based on residency
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 Law) 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.
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.