For foreigners working in China, determining the applicability of individual income tax to one's situation involves decoding a set of intersecting criteria and rules. Following this, you will need to calculate your precise liability and any applicable deductions. Lastly, consulting with Talent Spot specialist can help optimize one's overall income to achieve the most profitable package for you or your employees.
China's Individual Income Tax Law recognizes eleven different categories of income, with a host of different deductions, tax rates and exceptions applying to each of them. As our focus here lies with foreign employees, this article will only address the tax treatment of employment income, including salaries, bonuses, stock options and allowances.
A non-resident individual who has worked in China continuously or cumulatively for less than 90 days in a tax year only has to pay IIT on income for work done in China and for which the salary is paid by Chinese domestic institutions, entities or individuals. IIT on income derived from working outside of China or paid by a foreign employer outside of China will be exempt. If there is a double taxation agreement (DTA) in place between a foreign country and China, the 90-day limit may be extended to 183 days, depending on the relevant DTA.
An individual who has resided in China for more than 90 days but less than one year during the tax year is subject to IIT on all China-sourced income, including income paid by both Chinese and overseas entities for his/her work in China. Income earned while working overseas (i.e., foreign-sourced income) in the tax year is not Chinese IIT taxable.
An individual's period of residency in China is calculated based on the calendar year, excepting temporary absences from the country of up to 30 days continuously or 90 days cumulatively – which are not counted toward the individual's stay in China.
A foreign individual who is deemed to have resided in China for more than one year but less than five years must pay IIT for income received from both Chinese and foreign employers for work conducted in China (China-sourced income), and also for income paid by Chinese employers during any temporary absences from the country. Income obtained from foreign employers for work done during a temporary absence is not taxable.
A foreign individual who has resided in China for more than five years continuously may face new IIT liabilities identical to those of a resident individual of China, depending on the duration of his/her residency in China starting from the sixth year.
If a foreign individual resides in China for one year in the sixth or any following single year, he/she would be considered a resident individual under the IIT Law and therefore liable for IIT on income received globally for that specific tax year; if the individual resides in China for less than one year in the sixth or any following single year, he/she is subject to IIT on only China-sourced income, and the One-year Rule applies.
The five-year threshold will be reset if the individual resides in China for less than 90 days in any single tax year starting from the sixth year, in which case the "90-day Rule" will apply for that tax year. Understanding the "Five-year Rule" is especially important for foreign companies with expats working in China for the long-term as their IIT burden may be significantly reduced if their stay in China is managed properly.
Like in most nations, individual income tax in China is levied at a progressive rate. The tax brackets and corresponding rates are shown below. To avoid the hassle of calculating the different parts of one's income at different tax rates, the table below includes a Quick Deduction figure. This allows you arrive at the amount of tax payable by entering the full income into the highest applicable tax rate, and then subtracting the Quick Deduction amount.
The formulas for calculating an individual's tax payable are:
Monthly taxable income = Monthly income – RMB 4,800 (Standard deduction) – Allowances
Tax payable = Monthly taxable income × Applicable tax rate – Quick calculation deduction