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As a foreigner working in China, it is essential to understand the income tax obligations and regulations that apply to you. In today's article, we try to explain which part of income tax foreigners need to pay, how it is defined, the calculation of income tax, special deductions, and other important considerations.
1. Which part of income tax do foreigners in China need to pay? How is it defined?
In China, income tax obligations for foreigners depend on their residency status. There are two categories:
a) Resident taxpayers: Individuals who have a domicile within China or who accumulate 183 days or more of residence in China within a tax year without a domicile. Resident taxpayers are required to pay individual income tax on income obtained from within and outside China.
b) Non-resident taxpayers: Individuals who neither have a domicile nor reside in China or who accumulate less than 183 days of residence in China within a tax year without a domicile. Non-resident taxpayers are required to pay individual income tax on income obtained from within China.
Important Notes:
1) Foreigners who have resided in China for a cumulative period of 183 days or less for less than six consecutive years may be exempt from paying individual income tax on income derived from sources outside China and paid by overseas units or individuals, upon filing with the competent tax authority. If a departure exceeds 30 days in any year when cumulative residence in China has reached 183 days, the consecutive years of residence in China for 183 days will be recalculated.
2) Foreigners with no domicile in China and a cumulative residence of not more than 90 days in a tax year may be exempt from paying individual income tax on the portion of income derived from within China, paid by the overseas employer and not borne by the employer's institutions or establishments within China.
Therefore, for foreign employees within a tax year (calendar year):
(1) Chinese tax residents-worldwide income is taxable;
(2) Non-Chinese tax residents-income sourced within China is taxable; income sourced from outside China is not taxable.
2. Calculation of income tax
The calculation of Individual Income Tax (IIT) follows this formula: Tax payable = (monthly income - 5,000 yuan (threshold) - special deductions (social insurance, housing fund, etc.) - special additional deductions - other deductions) × applicable tax rate - quick deduction.
For example, if the monthly income is 8,000 yuan and the total deductions amount to 5,000 yuan, with a tax rate of 3%, the IIT to be paid would be (8,000 - 5,000) × 3% = 90 yuan.
3. Can foreigners also enjoy special additional deductions?
Starting from January 1, 2022, foreign individuals no longer enjoy tax-free preferential policies for housing subsidies, language training fees, children's education expenses, etc. However, according to Notice No. 43 of 2021 issued by the Ministry of Finance and the State Administration of Taxation, relevant preferential policies for foreign individuals regarding subsidies and other benefits will be extended until December 31, 2023. Hence, till December 31, 2023, foreigners can still enjoy tax-free preferential policies for housing subsidies, language training fees, children's education expenses.
4. Other special provisions for IIT for foreigners
1) How to resolve the issue of dual tax residency?
China has signed bilateral tax treaties or arrangements with more than 110 countries and regions to avoid double taxation for taxpayers.
2) Self-declaration of tax should be carried out in the following cases:
* If the withholding obligor fails to withhold and pay taxes, the taxpayer should file a tax declaration with the competent tax authority in the location of the withholding obligor before June 30 of the following year in which the income is obtained.
* Non-resident individuals should file a tax declaration before June 30 of the following year if they leave China (excluding temporary departures).
* If income from salaries is obtained from more than two sources within China, the tax declaration should be made within fifteen days of the following month when the income is obtained.
3) What are the penalties for not paying IIT properly?
Failure to pay Individual Income Tax (IIT) in accordance with the provisions of the IIT Law may lead to legal liability in accordance with the Tax Collection and Administration Law and relevant regulations. Individuals providing false information with serious circumstances may be included in the credit information system and subject to joint disciplinary action.
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