Tax Risks for Expatriates in China

​published on June 26, 2018

In year 2015 we have reported that the local tax authority in Beijing raised their attention to a certain group of expatriates who interrupted the “five year circle” to avoid the disclosure of their entire worldwide income and taxation in China. With promotion of permanent residence for expatriates in China and implementation of the Common Reporting Standards (“CRS”) in last years, the expatriates resident in China should pay more attention to relevant risks.

“Five year circle”

According to the prevailing Chinese tax regulations, an individual who is not domiciled in China but stays in China for five consecutive full years would have the obligation to declare and pay Chinese individual income tax (“IIT”). The so-called “five year circle” could be interrupted and re-counted from the very beginning if the individual stays outside China for more than 30 days in a single trip or more than 90 days in multiple trips within any one of aforesaid five calendar years.
 

Lots of expatriates are actually settled down in China with their families, careers and even properties. According to the Chinese regulations, the tax residence is determined depending on the habitual residence and length of stay instead of the nationality. For such expatriates, the Chinese tax authority can assess that they are domiciled in China (i.e. habitual residence in China due to the reasons of household register, family and economic interest).
 

Although they consciously interrupted the “five year circle”, this will not help them to argue the non-constitution of tax residence in China.
 

Since there are differences in national tax laws between different countries, the assessment of tax residence varies. In some cases, the bilateral double tax treaty between two countries should be referred. According to our experience, the Chinese tax authorities are careful to such assessment and concentrate more on the substance of the arrangement.
 

It shall be noted that, since 2016, under the “bringing-in” and “going-out” policies, China is actively implementing more effective permanent residence policies for expatriates. The effectiveness of “Opinions on Intensifying the Management of Permanent Residence Services for Foreigners” clearly specified the requirement for expatriates to apply for permanent residence permit (i.e. Green card) in China has been reduced, the procedures are also being simplified.
 

Except for certain rights and obligations that are not legally stipulated by laws and regulations, those expatriates who holds permanent residence permit shall principally enjoy the same rights and obligations as Chinese citizens, so-called “national treatment”. For example, no restrictions on the stay period, exemption for apply working visa, children’s education, social security, house purchasing in China, etc. Under such conditions, more expatriates may consider applying for a permanent residence permit in China.
 

Renewed Amendments of IIT in China

On June 19, 2018, the draft of IIT law amendments was published for review and approval. The amendments would lead to a fundamental IIT reform in China.
 

The reform includes following changes:

• Increase of standard deduction from 3,500 CNY to 5,000 CNY per month (60,000 CNY per year);
• Introduction of special additional deduction of education costs for children, further education costs,
• medical costs for serious illness, mortgage interest for house and rental etc.;
• Wages and salaries, service income, author's remuneration and royalties will be subject to complex taxation;
• Introduction of Anti-Tax-Avoidance clause;
• For foreign expatriates, the monthly standard deduction will be unified from current 4,800 CNY to 5,000 CNY.

Conclusion

As a whole, the income tax administration of expatriates working in China is becoming tighter. According to our experience, those expatriates who have stayed in China for many years with local unlimited term labor contracts, and have Chinese nationality spouses and even properties in China, may have higher risks of being challenged by Chinese tax authorities regarding the habitual residence.
  

Meanwhile, it should be noted that although obtaining a Chinese green card represents having the right to permanently reside in China, the IIT obligation should still be fulfilled according to the Chinese tax laws and regulations and relevant double tax treaty. There is no clear regulation to provide a direct relation between green card and assessment of tax residence. Expatriates who have permanent residence permit in China could be Chinese tax resident and could not be Chinese tax resident, which is depending on whether the expatriates are domiciled in China, how long they stay in China and whether they have tight economic interest and other factors.
 

With the globally implementation of CRS, once an expatriate is identified as Chinese tax resident, his oversea investments, insurances with cash value, salary/service income, family trusts and other financial accounts information will gradually be exposed to the Chinese tax authorities and may result in higher tax risks. Even if they are not recognized as Chinese tax resident, their financial accounts in China will be treated as “accounts of non-tax resident” and the information will be exchanged with the state of their tax residence.
 

It is recommended that foreign expatriates in China should have a self-check on their tax residence status to avoid risks of double taxation.