Personal Tax Advice in China

Personal tax residence

General

In China, individuals who are domiciled in China or who reside in China for 183 days or more in a tax year are generally considered residents for IIT purposes and are subject to IIT on their worldwide income. Non-China-domiciled individuals who reside in China for less than 183 days in a tax year are generally considered non-residents for IIT purposes and are subject to IIT on their China-source income only.

Foreign individuals and residents of Hong Kong, Macau, and Taiwan are generally taxed based on their physical presence in China. Foreign individuals who reside in China for less than 183 days are taxed only on their China-source income.

Foreign individuals who reside in China for 183 days or more in a tax year but not more than six consecutive years are subject to tax on both their China-source income and their foreign-source income.

If they reside in China for 183 days or more per year for over six consecutive years, they will be subject to IIT on their worldwide income from the seventh consecutive year onward.

However, as a concession, foreign-source income is taxed only to the extent of income paid and/or borne by a China entity or individual.

China source income

The following categories of income are considered China-source income, regardless of whether the payments are made within China or not:

• income derived from employment or contracted labor services performed within the territory of China,
• rental income in relation to property used within the territory of China,
• income derived from the transfer of real property located within China or other property transfer transactions incurred within the territory of China,
• income derived through the grant of various franchises to be used within the territory of China,
• interest and dividend income paid by companies,
• enterprises, other organizations, or resident individuals within the territory of China, author’s remuneration paid or borne by companies, enterprises, or other organizations within the territory of China, incidental income paid or borne by companies, organizations, or resident individuals within the territory of China,
• business income derived from business activities performed within the territory of China, and
• income from transfer of equity in a foreign entity if, at any time during the three-year period prior to the transfer, more than 50% of the fair value of the assets of the invested foreign entity is derived directly or indirectly from immovable properties located within the territory of China.

Types of personal income and gains in China

When it comes to determining an individual’s income in China, there are nine categories that all types of income must be grouped under.

Employment income, which includes wages, bonuses, and benefits, is taxable, except for business-related expense reimbursements and certain non-taxable fringe benefits.

Chinese social security contributions made by the employer are not taxable for Individual Income Tax (IIT) purposes, but overseas social security contributions are subject to IIT.

Statutory pension income received after retirement is tax-exempt.

Income from equity compensation plans is generally considered employment income, but may be eligible for favorable tax calculation treatment.

Labour service income refers to independent services such as consulting or medical practice. Business income earned from privately-owned businesses, sole proprietorship enterprises, and partnership enterprises are taxed at the individual level, and qualified expenses and costs are deductible.

Income from property transfers, dividends, interest, rental properties, and intellectual property (IP) are also taxable.

Income from IP includes royalties, which are subject to progressive tax rates of 3% to 45%, and income from the transfer of IP, which is considered capital gain and subject to a flat tax rate of 20%.

Author’s remuneration is subject to progressive tax rates.

Certain income derived by foreign individuals in relation to IP may not be taxable in China, depending on their physical presence in China and the source of the income.

Social security contributions

In China, people who work there have to pay money into social security funds. This includes things like pensions, medical care, unemployment benefits, and compensation for work-related injuries.

Since 2011, foreign workers in China also have to pay into these funds if they have a work permit. The amount people have to pay varies depending on where they work, and there are different rates for employees and employers.

There are limits on how much money people have to pay into the funds each month. The limits change from year to year, and they also vary depending on the region people work in. Employers are responsible for taking the money out of their employees’ paychecks and sending it to the government each month.

China has agreements with 11 other countries to help people who move between these countries. People who come from these countries may be able to get out of paying some social security contributions in China, depending on the agreement.

These agreements cover things like pensions and unemployment insurance. One agreement with France has been signed but is not yet in effect.