Important facts to know when sending employees to China – employee secondments and Individual Income Tax

By Richard Hoffmann, ECOVIS Beijing China

Sending employees to China – employee secondments and Individual Income Tax. Companies that have staff overseas in China might face difficulties when it comes to the company’s and the individual’s tax status and taxable individual income. It is of high importance to understand and to follow the regulations as non-compliance could lead to severe damage for the seconding company, even if it wants to enter China in the future with a subsidiary. So make sure you have an advisor at hand who knows which traps to avoid. Whether it’s already in China or wants enter the Chinese market in the future.

Depending on the country of the company, sending the staff, different tax duties are imposed on individual income, because of existing or not existing Double Taxation Agreements. This article shall try to answer some common tax and social insurance related questions when sending staff to China. Several countries have Double Taxation Agreements (DTA) with China and thus help to avoid their expats in China to pay tax in only one of the two countries. The basic rule though says that any income derived from China must be taxed. This also implies that smart tax planning is necessary.

To find out more about tax planning contact us here.

First of all there are several cases that should be considered when sending an expat to work in China.

1. Expat stays less than 90 days (or 183 days if DTA exists) in China
   1. Salary paid from abroad
   2. Salary paid from inside China
2. Expat is longer than 90/183 days but less than one year in China
3. Expat is longer than one year but less than five years in China
4. Permanent Establishment

1. Expats who stay less than 90 days inside China don’t have Individual Income Tax (IIT) obligation if their salary is borne by an overseas entity. If a signed DTA is in place, this time frame of 90 days would be extended to 183 days. Unless the Expat’s salary is borne by a Chinese entity, he doesn’t have to pay Individual Income Tax. An exception for foreign senior executives like e.g. CEOs, General Managers, Chief Representatives, etc. exists if their salary is borne by an overseas entity, as this salary is subject to PRC IIT even if the expat stays less than 90/183 days. Besides that, the employer has the obligation of withholding the employee’s IIT from the first day of entry in China.

2. If the Expat stays in China longer than 90/183 days but less than one year, besides his income derived from China borne by a Chinese entity, his income borne by an overseas entity must also be taxed. Understanding the following will help employers save tax and money when sending staff to China. We can help you to get the maximum out of your resources. After deducting the tax exempted amount of the expat’s gross salary, the applying tax rate can be calculated by:

Taxable Income x Applicable Tax Rate – Quick Deduction = Tax Payable

According to the PRC IIT law, expats are entitled to tax exemption on such allowances as housing, language training (Chinese), children tuition fee, food and laundry allowances, etc.. With regard to annual bonus, a preferential treatment could be adopted and therefore annual bonus IIT is less than that of the monthly’s salary. If an expat’s annual compensation package is fixed, it is sensible to structure a proper proportion between salary and bonus to optimize the total annual IIT.

3. If the Expat stays in China for more than one year but less than five years he will also have to pay IIT on overseas income borne by Chinese entities or establishments.

4. Critical for many companies is the status of a “Permanent Establishment” which could automatically result if the expat stays in China for more than 183 days within a period of consecutive 12 month. This is based on the Chinese Circular Guoshuifa [2010) 75. For example if the service provided would be the installation of a machine for a client and it would take longer than 183 days, this might be considered as “Service Permanent Establishment”. In such a case Corporate Income Tax would arise from the secondment, leading to increased costs for the company

If the expat wants to avoid filing annual IIT, he can consider staying out of China for more than 30 consecutive days or for more than 90 accumulated days within consecutive 12 month.

There are certain steps and things you should know, before sending your staff to China. If you want to get more information on that contact us now via our contact page. Plan ahead and avoid surprises.

Having consulted hundreds of international companies over the last years, we can give you all the necessary information to be successful in China. Our Professional Lawyers, Tax consultants and Auditors should be your first choice when seeking quality advisory.

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