Foreign-Sourced Income Declaration in China

Right after the publication of the detailed guideline of the annual individual income tax (“IIT”) reconciliation, the State Administration of Taxation (“SAT”) of China published the Public Notice [2020] No. 3 (“Circular 3”), in order to provide specific guidance on declaration of foreign-sourced income during annual IIT reconciliation.

Obligation of Declaration

As a general rule, resident taxpayers in China are obliged to declare their foreign-sourced income to the Chinese tax authority.

While there is still a particular exemption rule for a special group of resident taxpayers:

who are not domiciled in China; and
who have not physically stayed in China for no less than 183 days for six consecutive years.

The special group is exempted from paying Chinese IIT on their foreign-sourced income which is not paid or borne by a company or an individual in China.

Definition of Foreign-Sourced Individual Income

Circular 3 has defined the foreign-sourced individual income according to the location of:

activities carried out, e.g. income from labor services rendered outside China, for which time-apportionment method are usually used for quantification;
payers, e.g. interest and dividend income paid or borne by an enterprise located outside China or a non-resident taxpayer of China;
transaction targets, e.g. income from transfer of immovable property located outside China and from transfer of equity investment in enterprises located outside China.

IIT Calculation

In general, resident taxpayer should calculate their Chinese IIT on both the China-sourced and foreign-sourced income, and foreign income tax paid on their foreign-sourced income, if any, can be offset from the China IIT payable of the current period. The offset limit is the IIT calculated in accordance with the Chinese IIT law on the foreign-sourced income. The portion in excess of the offset limit can be carried forward to the next five years.

It is particularly pointed out that only income tax imposed by foreign countries can be offset, which excludes foreign income tax which should not be imposed according to double tax treaty and interests, late payment surcharges or administrative penalties connected with foreign income tax, etc. In view of that, it is recommended that taxpayers should keep solid documentation to support the nature of the tax payments they made outside China, especially to separate the creditable foreign income tax from those uncreditable payment items.

Assistance Declaration Obligations of Chinese Enterprise

Circular 3 highlights the declaration assistance obligations of a Chinese enterprise who dispatches resident taxpayers to work outside China, where the relevant remuneration, i.e. the foreign-sourced individual income, is to be paid by a foreign enterprise. In such case, the dispatching Chinese enterprise could:

take over the IIT withholding obligation on the foreign-sourced income; or
report the details of the dispatched employees to the Chinese tax authority by the end of the following February.

The details to be reported include all personal information, income information and tax payment information.

If the dispatching enterprise takes over the withholding obligation, Circular 3 explained that the remuneration payer outside China could withhold the relevant Chinese IIT, pass the tax fund to the dispatching enterprise in China for them to declare and settle it with the Chinese tax authority.

Under such arrangement, cross-border tax fund remittance will be processed regularly so that support from the Chinese banks or SAFE will be necessary. In addition, taking the offsetting of foreign income tax payment into consideration, the calculation of the Chinese IIT to be withheld is also relatively complicated.

Our Recommendation

In general, the declaration of foreign-sourced individual income in Chinese IIT filings demands relatively higher professional expertise, as it requires detailed assessment, and complicated calculation. We recommend concerned taxpayers, especially high net worth individuals who have diversified income categories derived in- and outside China, to seek for professional assistance where necessary, to mitigate their tax compliance risks in China.