{"id":4778,"date":"2013-08-09T05:40:10","date_gmt":"2013-08-09T04:40:10","guid":{"rendered":"http:\/\/www.ecovis.com\/focus-china\/?p=658"},"modified":"2021-09-06T15:01:28","modified_gmt":"2021-09-06T13:01:28","slug":"individual-income-tax-in-china-part-1-the-ground-rules","status":"publish","type":"post","link":"https:\/\/www.ecovis.com\/focus-china\/individual-income-tax-in-china-part-1-the-ground-rules\/","title":{"rendered":"Individual Income Tax (IIT) in China. Part I: The Ground Rules"},"content":{"rendered":"<p><i>By <\/i><a href=\"mailto:richard.hoffmann@ecovis.com\">Richard Hoffmann<\/a>, <a title=\"ECOVIS Beijing China\" href=\"https:\/\/www.ecovis.com\/beijing\" target=\"_blank\" rel=\"noopener\">ECOVIS Beijing China<\/a><\/p>\n<p>In a mini series of two articles we would like to share some information about a topic we not only deal with in our consulting work on a daily basis, but which also affects everybody living and working in China on a very personal level: individual income tax for expats. <!--more-->We hope to give you a detailed and concise account of current IIT laws in China and point out a few tips for avoiding too costly taxation. In this first part of the series we will now deal with the basics of expat IIT liability.<\/p>\n<h3>Main Factors for IIT Liability<\/h3>\n<p>To understand when foreigners working in China will be liable to pay IIT in China, it is important to know about several key factors. Whether IIT needs to be paid by an expat in China and how much IIT needs to be paid depends on:<\/p>\n<ul>\n<li>How much the expat earns<\/li>\n<li>How long the expat stays in China<\/li>\n<li>Who bears the expat\u2019s income<\/li>\n<li>What kind of \u00a0positions the expat is holding in his host country and home country company<\/li>\n<\/ul>\n<h3>Level of Income<\/h3>\n<p>First of all, it needs to be clear which portions of the money an expat receives from the employer are deemed to be taxable income by the Chinese authorities. This includes the base salary, incentive compensations like commissions and bonuses, cash allowances and contributions to an overseas insurance scheme.<\/p>\n<p>The tax rate levied on that taxable income then depends on its cumulated amount. China adopts a progressive taxation system where the tax rate for freelancer\u2019s incomes progresses in three levels from 20% to 40% and the tax rate for regular employees in seven levels from 3% to 45%. A tax exemption of 4800 RMB per month for expats and of 3500 RMB per month for locals is granted. Furthermore, for each individual taxation grade there is a quick deduction amount which will be exempted additionally for this level of taxable income.`<\/p>\n<p>The following table gives an overview of IIT taxation grades.<\/p>\n<p><a href=\"https:\/\/www.ecovis.com\/focus-china\/wp-content\/uploads\/2013\/08\/Taxation_Focus_Beijing_Ecovis.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignleft  wp-image-4091\" src=\"https:\/\/www.ecovis.com\/focus-china\/wp-content\/uploads\/2013\/08\/Taxation_Focus_Beijing_Ecovis-300x165.png\" alt=\"Taxation_Focus_Beijing_Ecovis\" width=\"420\" height=\"231\" \/><\/a><\/p>\n<p>Thus, a quick formula to calculate the IIT burden is:<\/p>\n<p><strong>[(Gross Monthly Taxable Income\u2013 4800) * Tax Rate] \u2013 Quick deduction<\/strong><\/p>\n<h3>Duration of Stay and Payment Source<\/h3>\n<p>Furthermore, it has to be determined which part of the worldwide income the expat might receive for various assignments from various sources is deemed taxable in China. The second important factor in determining an expat\u2019s IIT liability is therefore the duration of his\/her stay in China. The relevant thresholds for IIT liability are 1 day, 90 (respectively 183) days, 1 year and 5 years. In combination with the third important factor, the source of payment for the expat\u2019s income, we can then determine on which part of his\/her worldwide income an expat needs to pay IIT in China.<\/p>\n<p>If the expat is being paid for his assignment in China by a China company \u2013 i.e. his income is borne by a Chinese legal entity \u2013 then he\/she will be liable to pay IIT from his first day on. In contrast, if the expat\u2019s China source income is borne by a Company outside of China \u2013 an overseas entity \u2013 then he\/she will not be liable to pay IIT in China, unless he\/she stays in China for more than 90 days. If there is a tax treaty between China and the expat\u2019s home country, this threshold is usually extended to be 183 days.<\/p>\n<p>Furthermore an expat might not only have to pay IIT in China on his income derived from activities in China, but possibly also on additional income derived from outside of China. Again, IIT liability on worldwide income depends on duration of stay and source of payment for that income.<\/p>\n<p>If the expat\u2019s out-of-China income is borne by a Chinese legal entity and the expat stays in China for more than one year, he will have to pay IIT on this income as well. If he stays in China less than a year, he will not have to pay IIT on the income derived outside of China. However, there is one exemption to this, which applies, should the expat hold a dual senior management role in China and another country and should the payment for his work outside of China be borne by a Chinese entity. In this case the expat will have to pay IIT on the income derived from out of China from the very first day.<\/p>\n<p>In the final and most tax-intensive case the expat will be liable to pay Chinese IIT on his worldwide income. This case is referred to as the \u201cFive-Year-Rule\u201d as it applies when the expat has been staying in China continuously for a period of more than five years, i.e. has been a tax resident for more than five years. Then, all income derived from overseas and borne by overseas entities will also fall under the Chinese IIT regime.<\/p>\n<p>The following table gives an overview of the discussed scenarios.<\/p>\n<h3>\u00a0<a href=\"https:\/\/www.ecovis.com\/focus-china\/wp-content\/uploads\/2013\/08\/IIT_table_income_time.jpg\" target=\"_blank\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone  wp-image-665\" src=\"https:\/\/www.ecovis.com\/focus-china\/wp-content\/uploads\/2013\/08\/IIT_table_income_time.jpg\" alt=\"individual income tax (IIT) liability for expats in China depending on income type and time spent\" width=\"594\" height=\"321\" \/><\/a><\/h3>\n<h3>In a nutshell<\/h3>\n<p>As we have seen individual income tax liability for expats in China depends on a \u2013 sometimes very complex \u2013 combination of factors. An expat planning to keep his personal tax burden at a reasonable level should plan accordingly and carefully assess the structure of his taxable income, his income-generating activities in and out of China, the sources of his income and the duration of his stay in China.<\/p>\n<p>In the next part of our mini-series on Chinese IIT for expats we will deal with some tips regarding the 5-year-rule and the structure of the salary\/employment contract, which can help to keep the expat\u2019s IIT burden at a reasonable level.<\/p>\n<p style=\"text-align: right;\">with contributions by Claudia Foecking <\/p>\n<hr \/>\n<p><a href=\"http:\/\/www.mylanderpages.com\/ecovisbeijing\/ecovis-contact-form_2\" target=\"_blank\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" class=\"alignleft size-full wp-image-1524\" src=\"https:\/\/www.ecovis.com\/focus-china\/wp-content\/uploads\/2013\/12\/contactusbutton1.png\" alt=\"contactusbutton\" width=\"317\" height=\"79\" \/><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>By Richard Hoffmann, ECOVIS Beijing China In a mini series of two articles we would like to share some information about a topic we not only deal with in our consulting work on a daily basis, but which also affects everybody living and working in China on a very personal level: individual income tax for [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[798,37,33],"tags":[92,106,94],"class_list":["post-4778","post","type-post","status-publish","format-standard","hentry","category-blog","category-miscellaneous","category-tax-policy","tag-expat","tag-iit","tag-individual-income-tax"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Individual Income Tax (IIT) in China. 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