Definition and requirements

In the People’s Republic of China (hereinafter also referred to as PRC), a tax resident is someone who:

• has a domicile in China
• does not have a domicile in China, but has resided in China for 183 days or more cumulatively within a tax year, based on the Amended PRC personal income tax law and its Implementation Rules

Supporting materials on the actual residing period in China, including embarkation and disembarkation information etc., shall be kept for record.

Days of presence

The rules of presence depend on each individual agreement signed by China and another country, however, the Public Notice 2019 No. 34 provides guidelines for determining whether a non-PRC-domiciled individual spends a day in the PRC. The amended rule provides that a non-PRC-domiciled individual will be deemed to have spent a day in the PRC if they are physically present in the PRC for 24 hours on that day. The day the individual arrives or departs from the PRC is not counted as a day in the PRC so long as the individual is not present in the PRC.

Split tax residency

Split tax residency is acknowledged between more countries within one tax period.

Tax rate and tax period

• 3 – 45% is the range of the applicable tax rate: the individual income tax rates are 3%, 10%, 20%, 25%, 30%, 35% and 45%, depending on the taxable income amount of the employee

In China, the tax period is the same as the calendar year.

Tax base and deductions

When a company pays wages and salaries to an employee who is regarded as resident individual, it must compute the personal income tax amount using the ‘cumulative withholding method’ and withhold the income tax on a monthly basis. The amount of taxable income subject to cumulative withholding is calculated by deducting various items – including the cumulative tax-exempt income, the cumulative standard deductions, the cumulative special deductions, the cumulative special additional deductions, and cumulative other deductions determined pursuant to the law – normally from the taxpayer’s cumulative income from wages and salaries for the tax year derived from employment up to the current month.

When a company pays wages and salaries to a non-resident individual, it must withhold the personal income tax on a monthly basis, or for each payment. The amount of taxable income is calculated by lessening standard deduction (RMB 5,000) and other deductions-special deductions (where it is applicable), deductible allowances (where it is applicable) – from the non-resident taxpayers’ monthly income amount liable to Chinese personal income tax.

Under the new personal income tax law, the following types of individual income shall be exempted from individual income tax:

• Awards for achievements in science, education, technology, culture, public health, sports, environmental protection, etc. granted by the provincial People’s Governments, ministries and commissions under the State Council, units of the Chinese People’s Liberation Army at or above corps level, as well as foreign organizations and international organizations
• Interest income on treasury bonds and other financial debentures issued by the State
• Subsidies and allowances issued on a unified basis in accordance with the provisions of the State
• Military severance payment, demobilization pay and decommissioning pay received by the members of the armed forces
• Welfare benefits, compensation and relief funds; Insurance claims
• Settling-in allowance, severance pay, basic pension or retirement pay, retirement allowances and subsidies given to public servants and workers on a unified basis in accordance with the provisions of the State
• Income derived by diplomatic representatives, consular officers and other personnel of embassies and consulates in China, which are exempted from tax in accordance with the provisions of the relevant laws of China
• Tax-exempt income stipulated in international conventions and executed agreements to which the Chinese Government is a party
• Other tax-exempt income stipulated by the State Council

Furthermore, employees are allowed to make the following deductions in order to decrease their tax base:

• Standard deduction: RMB60,000 (yearly exempt amount, which is RMB5,000 per month)
• Special deductions: mandatory social security
• Special additional deductions (applicable only for tax resident): include specified expense amounts for children education, continuing education, medical treatment of major illnesses, housing loan interest or housing rent, support for elderly, etc.
• Tax-exempt allowances for foreigners: valid till December 31, 2023, but cannot be applied together with special additional deductions in the same year
• Other deductions determined pursuant to the law: such as payment by an individual for enterprise annuity and occupational annuity which comply with State provisions, expenditure of an individual for purchase of commercial health insurance and tax-deferred commercial pension insurance which comply with State provisions, and other deductible items stipulated by the State Council

Other tax benefits are personal income tax on lump-sum bonuses or on severance payment.

Social security rates and registration

Social welfare paid by both the employee and employer. For example, in Beijing the distribution goes the following way:

• 26.7% rate paid by the employer
• 10.5% rate paid by the employee

The employer is obliged to register the social welfare account for employees when they work for the first time. The reporting and the deposition of the whole payment is done by the employer, no matter whether it is a local or foreign employer.

Social security base calculation

In general, the amount of social security contributions is based on the total wage of the employee. For employees who work for a company for over a year the contributions are based on the monthly average of all wage income earned by them from January to December of the previous year. However, different cities have different upper and lower limits. It depends on which city the employee is located at. The social security contributions are divided and paid into several funds such as pensions, unemployment, medical, work-related injury and others, but differently across cities.

Payment and reporting of the social security

Social security contributions are paid and reported on a monthly basis. The mandatory basic pension insurance, basic medical insurance, unemployment insurance, work injury insurance and maternity insurance are exempt from the personal income tax. Also, social security purchased from foreign countries cannot be tax exempted.

Regardless, the social insurance fee in China is collected by the tax bureau and the social insurance data had been merged into the tax system already.

Health (medical) insurance rates and registration

The rate of health insurance (or mandatory medical insurance) in China differs across cities. However, the mandatory medical insurance in China is paid both by the employee and the employer. The employer is obliged to deduct, pay and report these contributions on behalf of the employee from their income on a monthly basis.

Health insurance base calculation

The mandatory medical insurance is included in the social security contributions and each city calculates it differently, with different upper and lower limits.

Payment and reporting of the health insurance

Since the mandatory medical insurance is included in the social security contributions, it is payed and reported the same way, on a monthly basis.

Personal income tax return filing

The employer shall withhold the IIT (individual income tax) from the income salary of the employee every month and make the IIT filing. However, it is the liability of the employee to conduct the annual tax return if they are a tax resident. In case the employee requests the employer to handle it on behalf of them, the employer shall conduct it for the employee.

The annual tax return period is from March 1 to June 30 of the following year, with no possibility to extend the due date

The annual tax return can be filed via application, website or the tax bureau. Representation by a tax adviser and power of attorney is not required.

Avoiding double taxation

If there is no double tax treaty applicable, individuals who have no domicile in China are not subject to paying personal tax on their worldwide income until their number of consecutive years of residing in China is over six years. According to the official statement, the six-year rule counts starting from January 1, 2019. The number of years before 2019 are not included into the count of the six-years, and individuals who have no domicile in China are not subject to worldwide income tax before the year of 2024.

Besides, the count of the six-year can be reset by living in China for less than 183 days in a tax year, or by leaving China for more than 30 days continuously where their days of residence in China has reached 183 days in a tax year.

If there is a double tax treaty applicable, the used method shall be discussed case-by-case. Each city may require different documents, therefore the list of necessary materials required to apply any method to avoid double taxation shall be checked with the local tax bureau or tax officer case by case.

In general, an applicant applying for a Certificate of Fiscal Resident shall submit the following materials to the competent tax authorities:

• An application form for a Certificate of Chinese Fiscal Resident
• Supporting materials such as the contract, agreement, resolutions of the board or shareholders meeting, the relevant payment vouchers, etc. which relate to the proposed income for entitlement to tax treaty benefits
• In case the applicant is an individual who has a domicile in China, supporting materials that the applicant habitually resides in China due to their census registration, family or economic interests, including their identity information, statement on address etc., shall be provided
• In case the applicant is an individual who does not have a domicile in China but has resided in China for 183 days or more cumulatively within a tax year, supporting materials on the actual residing period in China, including embarkation and disembarkation information etc., shall be provided
• Where a domestic or overseas branch applies through its head office, the registration information of the head office and the branch shall also be provided
• Where a Chinese resident partner of a partnership enterprise submits an application as an applicant, they shall also provide registration information of the partnership enterprise.

Tax benefits and other specifics

To apply for available tax benefits, respective evidence is required. For example, the tax exempted allowances of foreigners require:

• Employment contract with specific clauses
• Rental agreement, if applicable for housing allowance
• Proper fapiao (official invoice issued by tax authority)

As to employment relationship, income sourced in China is determined by the ‘actual working period in China’ of the individual. Under the new IIT Law, actual working period is counted in days, which includes workdays, public holidays, annual leaves, as well as training days occurred during the work of the individual in China. For non-domicile individuals who are employed by domestic employer and overseas employer at the same time, or who are employed by overseas employer only, but provide work in China and overseas within the same period, a day in which the individual stays in China for less than 24 hours will be counted as half day when determining their actual working period.

Personal income tax return filing

In China, the employer is obliged to withhold and report the personal income tax of the employee every month. Filing for tax return is the obligation of the employee, but upon their request the employee may be involved for support.

The monthly tax is due till the 15th day of the month following the month in which the tax is withheld.

The annual tax return shall be submitted between from March 1 to June 30 of the year following the acquisition of the income. Normally, this period cannot be extended.

The annual tax return can be filed via application, website or the tax bureau. Representation by a tax adviser and power of attorney is not required.

Tax benefits and other specifics

The annual threshold of income for tax benefits and non-taxable amounts is RMB 60,000

When it comes to tax benefits, required documents and other specifics, the same applies to tax resident of other countries working and paying taxes in China as to tax residents of China working in one or more other countries. For further details, please refer to page 11 of this document (section Tax benefits and other specifics).

Penalties related to tax

Where the withholding agent shall withhold the undeducted or receivable uncollected tax, the withholding agent shall pay the withholding and uncollected tax and the corresponding late fee or fine. If the withholding agent conceals the taxable income for the taxpayer, the tax is not withheld or it is underpaid, it shall be treated as tax evasion.

• Delayed filing of the tax return: If a taxpayer fails to file tax returns and submit tax documents within the prescribed time limit (that is, within 3 months after the end of the tax year), the tax authority shall order the tax authorities to make corrections within a specified period A fine of not more than RMB 2,000; if the circumstances are serious, a fine of not less than RMB 2,000 but not more than RMB 10,000 may be imposed.
• Delayed payment of the due tax: If a taxpayer fails to pay or underpay taxes, the tax authority shall recover the non-paid or underpaid taxes and late fees. A fine of minimum 50% or maximum five times of the tax that is not paid or underpaid shall also be imposed. This kind of punishment is an administrative punishment, and the crime does not reach the level of violation that does not need to be transferred to the judicial authority to be punished by the tax administration authority.

Penalties related to social security

• Delayed report on social security: The penalty is 0.05% of the late social insurance payment on a daily basis starting from the day when the payment deadline is exceeded.
• Delayed payment of the social security contributions: The penalty is 0.05% of the late social insurance payment on a daily basis starting from the day when the payment deadline is exceeded.
• Delayed or missing registrations for the purposes of social security: If the employer does not apply for social insurance registration, the social insurance administrative department shall order it to make corrections within a time limit. Those who fail to make corrections within the time limit shall impose a fine of more than one time but less than three times the amount of social insurance premiums payable by the employer. The employer shall be fined not less than RMB 500 but not more than RMB 3,000.

Penalties related to health insurance

The penalties related to health insurance contributions are the same as penalties related to social security contributions.

Criminal acts

The later reporting or payment of due tax, social security or health insurance contributions does not result in criminal punishment, but there are related penalties, as specified above.