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Print articleChina: Individual Income Tax Clarification
November, 2004 -
The State Administration of Taxation issued the Notice on Several Issues in the Implementation of Tax Agreements and the Individual Income Tax Law on Individuals With No Domicile in China on 23 July 2004. The Notice, which entered into effect on 1 July 2004, clarifies a number of issues related to the levy of PRC individual income tax ("IIT") on expatriate employees.
General principles
There are two major factors relevant to the calculation of IIT for expatriates: the number of days per year spent in China (¡°days in¡±) and the source of income.
Generally, an expatriate is not subject to IIT for income for services rendered in the PRC so long as the expatriate has not stayed in the PRC for more than 90 days within a tax year. This tax-free length of stay is increased to 183 days for expatriates from countries with which China has entered into a bilateral tax treaty.
However, if the income for the services rendered in China is paid by an entity inside China, an expatriate employee will be subject to IIT irrespective of the number of days spent in China. Therefore, China-sourced income will always be subject to IIT.
Number of days in
The Notice changes the system for calculating the number of days, which an expatriate who has no domicile in China and no China-sourced income, spends in China. Whereas before, the date of arrival was counted and the date of departure was ignored when calculating the number of days in, the Notice provides that both the date of arrival and the date of departure need to be counted towards the number of days in. This means that expatriates often travelling back and forth to China may be caught sooner by the IIT obligation.
The Notice modifies the method of calculation for persons who hold concurrent positions with organizations inside and outside China or who hold a position with a foreign organization in China without a domicile in China. For such persons, the date of arrival, the date of departure and the date on which they arrive and leave within the same day will only be counted as half a day.
Calculation
The Notice provides three formulas for calculating IIT liability, which takes into account the apportionment of income between PRC and non-PRC sources and the apportionment of time between days in and days out of China.
The first formula is new and applies to individual taxpayers with no domicile in China but who, within a tax-paying year, have spent no more than 90 (or 183) days in China within a tax year. The formula is as follows:
The amount of individual income tax payable for the current month = amount of tax that would be payable calculated on the total amount of salary derived inside and outside China for the current month x [wages paid inside China for the current month ¡Â total amount of wages derived inside and outside China for the current month] x [number of days worked inside the territory of China in the current month ¡Â number of days in the current month].
The second formula applies to individual taxpayers with no domicile in China but who, within a tax-paying year, have spent more than 90 (or 183) days but less than a year in China within a tax year. The formula is as follows:
The amount of individual income tax payable for the current month = amount of tax that would be payable on the total amount of salary derived inside and outside China for the current month x [number of days worked inside the territory of China in the current month ¡Â number of days in the current month].
The third formula applies to individual taxpayers with no domicile in China but who, within a tax-paying year, have spent a year in China within a tax year and also applies to directors and senior management personnel of China based enterprises. The formula is as follows:
Amount of individual income tax payable for the current month = amount of tax that would be payable on the total amount of salary derived inside and outside China for the current month x (1 - [wages paid outside China for the current month ¡Â total amount of wages derived inside and outside China for the current month] x [number of days worked outside the territory of China in the current month ¡Â number of days in the current month]).
IIT obligations of senior management personnel
The Notice alters in certain circumstances the IIT treatment of expatriates who hold a senior management position in a PRC entity. An expatriate who concurrently holds a senior management position and the position of director will be assessed on the full income paid by the PRC entity irrespective of the days in. However, an expatriate who holds a senior management position but does not concurrently hold the position of director may have his IIT liability assessed according to the time apportionment method set forth above provided he does not spend a full year in China during a given tax year (except if the IIT treatment of senior management personnel is expressly addressed in the directors' fees clause in an applicable tax treaty/arrangement in which case such clause will apply).
General principles
There are two major factors relevant to the calculation of IIT for expatriates: the number of days per year spent in China (¡°days in¡±) and the source of income.
Generally, an expatriate is not subject to IIT for income for services rendered in the PRC so long as the expatriate has not stayed in the PRC for more than 90 days within a tax year. This tax-free length of stay is increased to 183 days for expatriates from countries with which China has entered into a bilateral tax treaty.
However, if the income for the services rendered in China is paid by an entity inside China, an expatriate employee will be subject to IIT irrespective of the number of days spent in China. Therefore, China-sourced income will always be subject to IIT.
Number of days in
The Notice changes the system for calculating the number of days, which an expatriate who has no domicile in China and no China-sourced income, spends in China. Whereas before, the date of arrival was counted and the date of departure was ignored when calculating the number of days in, the Notice provides that both the date of arrival and the date of departure need to be counted towards the number of days in. This means that expatriates often travelling back and forth to China may be caught sooner by the IIT obligation.
The Notice modifies the method of calculation for persons who hold concurrent positions with organizations inside and outside China or who hold a position with a foreign organization in China without a domicile in China. For such persons, the date of arrival, the date of departure and the date on which they arrive and leave within the same day will only be counted as half a day.
Calculation
The Notice provides three formulas for calculating IIT liability, which takes into account the apportionment of income between PRC and non-PRC sources and the apportionment of time between days in and days out of China.
The first formula is new and applies to individual taxpayers with no domicile in China but who, within a tax-paying year, have spent no more than 90 (or 183) days in China within a tax year. The formula is as follows:
The amount of individual income tax payable for the current month = amount of tax that would be payable calculated on the total amount of salary derived inside and outside China for the current month x [wages paid inside China for the current month ¡Â total amount of wages derived inside and outside China for the current month] x [number of days worked inside the territory of China in the current month ¡Â number of days in the current month].
The second formula applies to individual taxpayers with no domicile in China but who, within a tax-paying year, have spent more than 90 (or 183) days but less than a year in China within a tax year. The formula is as follows:
The amount of individual income tax payable for the current month = amount of tax that would be payable on the total amount of salary derived inside and outside China for the current month x [number of days worked inside the territory of China in the current month ¡Â number of days in the current month].
The third formula applies to individual taxpayers with no domicile in China but who, within a tax-paying year, have spent a year in China within a tax year and also applies to directors and senior management personnel of China based enterprises. The formula is as follows:
Amount of individual income tax payable for the current month = amount of tax that would be payable on the total amount of salary derived inside and outside China for the current month x (1 - [wages paid outside China for the current month ¡Â total amount of wages derived inside and outside China for the current month] x [number of days worked outside the territory of China in the current month ¡Â number of days in the current month]).
IIT obligations of senior management personnel
The Notice alters in certain circumstances the IIT treatment of expatriates who hold a senior management position in a PRC entity. An expatriate who concurrently holds a senior management position and the position of director will be assessed on the full income paid by the PRC entity irrespective of the days in. However, an expatriate who holds a senior management position but does not concurrently hold the position of director may have his IIT liability assessed according to the time apportionment method set forth above provided he does not spend a full year in China during a given tax year (except if the IIT treatment of senior management personnel is expressly addressed in the directors' fees clause in an applicable tax treaty/arrangement in which case such clause will apply).
