Taxation rules for French employees and managers based in China
The old rules did not provide a definition of tax residence. China had considered individuals who stayed in China for more than one year as tax residents. But now, a person is declared as a tax resident in China if :
- this person is domiciled in China (his/her habitual residence) with a residence/hukou card or if he/she has family and economic interests in China;
- has been in China for more than 183 days during the relevant tax year.
Rules favorable to expatriates
In China, tax residents are subject to IIT (Individual Income Tax) on their worldwide income, while non-residents are only taxed on their Chinese source income. Thus, the wages of non-residents in China are only taxable if :
- the employment is exercised in China;
- such treatment is provided by a stable establishment;
- the services are performed in China by the employee.
There are, however, exceptions:
- If an expatriate stays more than 183 days in China without being domiciled, he or she may be exempt from IIT on their non-Chinese source income paid by non-Chinese entities or individuals. However, they must meet this 183-day criterion for less than 6 consecutive years. It can be added that 30 consecutive days outside China are sufficient for the 6-year count to start from zero.
- If a non-resident expatriate stays in China for less than 90 days in a year, he or she will be exempt from IIT under the same conditions as the previous point.
A new category of income
The IIT is a schedular tax, i.e. it taxes each category of income differently according to its origin. Thus, IIT rates can vary between 3 percent and 45 percent of the individual’s total income. What is taxed by the IIT is an aggregation of several types of income including wages and salaries. Gains from the acquisition of stock options of listed companies received by a tax resident are also considered as part of wages and salaries for IIT.
Tax deductions and calculation methods
Deductions from the IIT are very limited. Taxpayers cannot deduct losses and expenses incurred for the purpose of earning wage income. However, there is a monthly lump-sum deduction of RMB 5,000.
Among the deductions from IIT are deductions from employee social security contributions, which are called “specific deductions”. On January 1, 2019, tax authorities created additional specific deductions. Thus, one can obtain a tax allowance on :
- the costs related to the child’s education
- continuing education
- housing loans
- residential rents
- health care spending
- the cost of care for the elderly
However, there is a ceiling on these deductions. For tax purposes, expatriate residents in China who enjoyed exemption from IIT on benefits in kind related to these same costs, but without a ceiling, should thus be disadvantaged by the reform. Therefore, a transitional arrangement is put in place, giving them the possibility to apply the old rules until December 2021.
In addition, there has been a change in the methods of calculating the IIT. Indeed, the latter is deducted at the source monthly and regularized at the end of the year. Employers are responsible for the payroll deduction. However, the calculation differs on whether or not one is a tax resident in China. Tax residents have their overall income subject to monthly installments of IIT on the sum of salaries already paid – the sum of monthly allowances of RMB 5,000, on specific (and additional specific) deductions as well as on other deductible items. The monthly salary will therefore not be fixed. The amount will decrease as the tax progressivity increases. Non-residents, on the other hand, will have their total income taxed on a monthly basis or at the time of payment of the income (net of the RMB 5,000 monthly lump-sum allowance). No annual tax return is required unless an exception is made.