CMS, China | Tax Policies for Individuals Who Do Not Have Domicile in China




CMS, China

Tax Policies for Individuals Who Do Not Have Domicile in China

Dear Sir or Madam,

Please find below our update on Tax Policies for Individuals Who Do Not Have Domicile in China.

Kind regards,
CMS, China

On 14 March 2019, Announcement [2019] No. 34 (“Announcement 35”) and Announcement [2019] No. 35 (“Announcement 35”) were released jointly by the PRC Ministry of Finance (“MoF”) and the State Administration of Taxation (“SAT”). Both announcements have clarified open issues under the new PRC Individual Income Tax (“IIT”) Law, effective from 1 January 2019, in respect of the IIT positions of individuals who do not have domicile in China (“Individuals”). The announcements have generally inherited the assessment rationales in the old regulations, which have been superseded by Announcement 35, under the old PRC IIT Law, but the detailed stipulations under these announcements are more advantageous and more implementable than under the old regulations. We provide below a summary for your attention.

1. Definition of days of residence

Under the new PRC IIT Law, if an Individual stays in China for no less than 183 days during a tax year, he / she shall be regarded as a PRC tax resident. According to Announcement 34, a day on which an Individual spends 24 full hours in China shall be treated as a PRC residence day. On the other hand, a day on which an Individual spends less than 24 hours in China can be excluded from the calculation of the number of PRC residence days.

This definition is more advantageous to the Individuals than the one in the old IIT regulations.
   
2. The “6 years rule” of IIT exemption treatment
   
  a) Interpretation of the “6 years rule”

Announcement 34 has interpreted the “6 years rule” under the new IIT Law. The rationale of the “6 years rule” is generally inherited from the “5 years rule” under the old IIT regulations, but the “6 years rule” provides better treatment to foreign nationals working in China.

Under the “6 years rule”, an Individual shall pay IIT for his / her worldwide income of the 7th tax year if ALL of the following conditions are met:
   
The Individual has stayed in China for no less than 183 days in the current 7th year;
The Individual had stayed in China for no less than 183 days during each of the past 6 years; and
The Individual did not leave China for more than 30 consecutive days in any of the past 6 years.
     
    If the Individual has stayed in China for no less than 183 days in the current 7th year but either of the other two conditions is not met, the non-PRC-sourced incomes which are paid by non-PRC individuals or organizations of the current 7th year can still be exempt from PRC IIT.
   
  b) Effective year of the “6 years rule”

The “6 years rule” starts from 2019. In other words, all the PRC residence records before 2019 will not affect the “6 years” assessment and thus at least before 2024 (including 2024), no Individual needs to pay IIT for his or her entire worldwide incomes.
   
3. Determination of taxable monthly salary incomes of the Individuals

The table below summarizes the calculation of taxable monthly salary incomes of the Individuals:
   
Number of PRC days within a tax year Taxable monthly salary incomes
Situation I:
No more than 90 days
If the Individual is NOT a Qualified Senior Manager1
   
  Taxable monthly salary incomes = total monthly salaries * (number of PRC working days of a certain month / total number of calendar days of the month) * (salaries paid or borne by PRC organizations / total monthly salaries)
   
If the Individual is a Qualified Senior Manager
   
  Taxable monthly salary incomes = total monthly salaries * (salaries paid or borne by PRC organizations / total monthly salaries)
Situation II:
Above 90 days but less than 183 days
If the Individual is NOT a Qualified Senior Manager
   
  Taxable monthly salary incomes = total monthly salaries * (number of PRC working days of a certain month / total number of calendar days of the month)
   
If the Individual is a Qualified Senior Manager
   
  Taxable monthly salary incomes = total monthly salaries * [1 - (number of non-PRC working days of a certain month / total number of calendar days of the month) * (salaries paid or borne by non-PRC organizations / total monthly salaries)]
Situation III:
No less than 183 days (NOT satisfying the conditions of the “6 years rule”)
Regardless whether the Individual is a Qualified Senior Manager or not,

Taxable monthly salary incomes = total monthly salaries * [1 - (number of non-PRC working days of a certain month / total number of calendar days of the month) * (salaries paid or borne by non-PRC organizations / total monthly salaries)]
Situation IV:
No less than 183 days (satisfying the conditions of the “6 years rule”)
Taxable monthly salary incomes = total monthly salaries (i.e., worldwide incomes)
1 “Qualified Senior Manager” refers to an Individual whose remunerations are subject to the articles of “Director’s Fees” in a bilateral double taxation treaty or arrangement between Mainland China and the relevant jurisdiction.
   
  Under the old IIT regulations, the apportionment methods applied to the IIT results calculated based on the entire monthly salaries. You may see from the table above, however, the apportionment methods are now applicable to the monthly salaries directly. Since the taxable incomes are finally subject to a progressive IIT rate system, the apportionment methods under the new IIT regulations can lead to less tax than the methods under the old IIT regulations because the taxable incomes after apportionment will be lower so that a lower IIT rate may apply.

Same as the requirement under the old IIT regulations, the income apportionment methods above can only apply to the Individuals who fully take offshore positions or take dual positions in and outside China. Individuals who solely work for the PRC duties are not supposed to enjoy the apportionment methods above.

The definition of “PRC working days” under the new IIT regulations is the same as under the old IIT regulations as follows:
 
PRC working days shall include actual onsite working days, public holidays spent in and outside China, personal leaves, training days, etc. during the PRC working period.
The day on which the individual spends less than 24 hours in China should be calculated as 0.5 PRC working day for time-apportionment purposes.
The number of non-PRC working days is the result of the total number of calendar days of the working period minus the number of PRC working days.
   
4. Determination of PRC-sourced multi-months’ bonuses (“MMBs”) and equity-based incentives (“EBIs”) received in a one-off manner

MMBs include bonuses attributable to multiple months, additional annual remunerations, profit sharing incomes, etc. EBIs include all typical types of stock incentive incomes. The sourcing area of taxable MMBs and EBIs shall be determined based on the following principles:
   

 

  a) MMBs and EBIs attributable to the Individual’s PRC working periods shall be treated as PRC-sourced incomes;

PRC-sourced MMBs and EBIs = total MMBs and EBIs * number of PRC working days during the working period to which the incomes are attributable / total number of calendar days of the working period
   

 

  b) If the MMBs and EBIs are remunerations for the contributions in various working periods, the PRC-sourced MMBs and EBIs of each working period should be calculated respectively and the final PRC-sourced income amount for IIT purposes shall be the sum of PRC-sourced income of each working period.
     
5. IIT calculation of MMBs, EBIs and certain other incomes of non-PRC tax resident Individuals
   

 

  a) IIT calculation of MMBs

The taxable MMBs shall be determined based on the formulae in Section 3 above (i.e., the PRC-sourced MMBs obtained in Section 4 above shall be further subject to potential time apportionment, where applicable). As a preferential IIT policy, the MMBs can be separate from other normal salary incomes for IIT purposes, but no pre-tax deductions are allowed for MMBs:

IIT payable = (taxable MMB / 6 * applicable IIT rate – applicable quick deduction) * 6

The progressive IIT rates applicable to monthly comprehensive incomes shall apply.

As you may be aware, the non-PRC tax residents are not supposed to enjoy the preferential annual bonus tax policy is offered to the PRC tax residents. However, if the non-PRC tax resident Individuals obtain MMBs, they can still enjoy the preferential policy above by lowering the applicable IIT rate through dividing the taxable MMB by 6.
   

 

  b) IIT calculation of EBIs

The taxable EBIs shall be determined based on the formulae in Section 3 above (i.e., the PRC-sourced EBIs obtained in Section 4 above shall be further subject to potential time apportionment, where applicable). As a preferential IIT policy, the EBIs can be separate from other normal salary incomes for IIT purposes, but no pre-tax deductions are allowed for EBIs:

IIT payable = [(total taxable EBIs received during the year / 6) * applicable IIT rate – applicable quick deduction] * 6 – IIT already paid during this year for EBIs

The progressive IIT rates applicable to monthly comprehensive incomes shall apply.
   

 

  c) Service incomes, author’s remunerations and royalty incomes

Service incomes, author’s remunerations and royalty incomes of non-PRC tax residents shall be taxed based on the IIT progressive rates applicable to monthly comprehensive incomes each time when the incomes are received.
   
6. IIT calculation of PRC tax resident Individuals

IIT of comprehensive income of PRC tax resident Individuals should be calculated as follows:

Annual IIT payable = annual comprehensive income – RMB 60,000 – Special Deductible Items (“SDIs”) amount – Special Extra Deductible Items (“SEDIs”) amount – other qualified deductible amounts) * applicable IIT rate – applicable quick deduction

All salary incomes (including taxable pre-deduction MMBs and EBIs), service incomes, author’s remunerations and royalty incomes shall be combined in the annual comprehensive income for calculation purposes. The progressive IIT rates applicable to annual comprehensive incomes shall apply.
   
7. Application of double taxation treaties / arrangements (“DTTs / DTAs”)

Announcement 35 clarifies that if an Individual is a tax resident of the other contracting state with which Mainland China has entered into a bilateral DTT or DTA, the Individual may choose either to enjoy the treatment under the relevant DTT / DTA or to give up the treaty benefits if the tax treatment under the PRC domestic IIT law is more favorable.
   

 

  a) Employment incomes (i.e., salary incomes)

Announcement 35 has confirmed the application of the DTT / DTA protection for the salary incomes received by an Individual who is a tax resident of the other contracting state.

It is noteworthy that Announcement 35 has provided a concession from the Chinese government in the case where the Individual is regarded as the tax resident of both China and the other contracting state – under such a circumstance, the DTT / DTA protection is still available and the “tie-break rule” under the relevant DTT / DTA does not need to be invoked. For example, if it can be proved that an Individual who has stayed in China for no less than 183 days during a tax year is also a tax resident of a foreign jurisdiction, the PRC tax authorities will give up the taxation right over the Individual’s non-PRC-sourced incomes.
   

 

  b) Service incomes

Announcement 35 has confirmed the application of the DTT / DTA protection under the articles in respect of independent personal services and business profits for the service incomes received by an Individual who is a tax resident of the other contracting state.

It is noteworthy that Announcement 35 has also provided the similar concession from the Chinese government in the case where the Individual is regarded as the tax resident of both China and the other contracting state – under such a circumstance, the DTT / DTA protection is still available and the “tie-break rule” under the relevant DTT / DTA does not need to be invoked.
   

 

  c) Director’s fees

If the remunerations received by a Qualified Senior Manager Individual who is a tax resident of a foreign jurisdiction meet either of the following conditions, the DTT / DTA protections under the articles of “Dependent Personal Services”, “Independent Personal Services” or “Business Profits” shall apply.
   
   
The applicable DTT / DTA does NOT encompass an article of “Director’s Fees”; or
Although the applicable DTT / DTA does encompass an article of “Director’s Fees”, this article is not applicable to the underlying remunerations.
   
    Otherwise, the IIT calculation formulae for Qualified Senior Managers in Section 3 shall apply.
     
  d) Royalty incomes and technology service incomes

Announcement 35 has confirmed the application of the DTT / DTA protection under the articles in respect of royalties and technology service fees received by an Individual who is a tax resident of the other contracting state.

It is noteworthy that Announcement 35 has also provided a similar concession from the Chinese government in the case where the Individual is regarded as the tax resident of both China and the other contracting state – under such a circumstance, the DTT / DTA protection is still available and the “tie-break rule” under the relevant DTT / DTA does not need to be invoked. In addition, under such a circumstance, the royalty incomes and technology service incomes can be excluded from the annual comprehensive incomes for separate taxation, even if the Individual is also a PRC tax resident.
   
8. Other rules regarding tax administration
   

 

  a) Conversion of PRC tax residency of a certain tax year

An Individual should estimate the number of his / her annual PRC working days upon his / her first IIT declaration in China.
   

 

   
If the Individual is firstly declared as a non-PRC tax resident but later turns out to be a PRC tax resident, the taxation method shall not be changed in the middle of the tax year, but the IIT settlement (i.e., the underpaid tax should be made up and the overpaid tax should be refunded) should be made when the Individual makes annual IIT declaration for the tax year. If the Individual leaves China in the middle of the year and is not expected to return, he / she may choose to complete the IIT settlement before leaving China.
   
If the Individual is firstly declared as a PRC tax resident but later turns out to be a non-PRC tax resident, he / she should report to the tax authorities during the period from the date on which he / she fails to meet conditions of a PRC tax resident to 15 days after the end of the tax year. Tax settlement will be made upon reporting and no late payment interest will be charged.
   
If the number of PRC working days during a tax year of an Individual is firstly expected to be no more than 90 but later turns out to exceed 90, or if the number of PRC days during the period stipulated under the relevant DTT / DTA is expected to be less than 183 but later turns out to exceed 183, the Individual should report to the tax authorities to make up the underpaid taxes of the previous months within 15 days after the end of the month during which the number of his / her PRC days exceeds 90 or 183. No late payment interest will be charged.
   

 

  b) Reporting obligation of the Chinese entity where an Individual receives salaries from the Chinese entity’s overseas related parties

Under the old IIT regulations, as long as the Individual is employed by or takes position in this Chinese entity, the Chinese entity has the obligation to withhold IIT for the Individual. However, Announcement 35 has released the Chinese entity from the statutory withholding obligation – under such a circumstance, the Individual can choose to self-declare IIT or to authorize the Chinese entity to withhold the IIT for him / her. Despite the above, the Chinese entity is required to report the relevant information to the tax authorities within 15 days after the end of the months to which the salaries are attributable, if the Individual does not authorize the Chinese entity to withhold IIT.
     

Should you have any query, please do not hesitate to contact the author:

Gilbert Shen
Counsel
Head of Tax Practice Area Group
CMS, China
T
+86 21 6289 6363

F
+86 21 6289 0731
E
gilbert.shen@cmslegal.cn

 


This information is provided for general information purposes only and does not constitute legal or professional advice. Copyright by CMS, China.

CMS, China
“CMS, China” should be understood to mean the representative offices in Mainland China of CMS Cameron McKenna Nabarro Olswang LLP, CMS Francis Lefebvre Avocats and CMS Hasche Sigle, working together. CMS, China is a member of CMS Legal Services EEIG, a European Economic Interest Grouping that coordinates an organisation of independent member firms. CMS Legal Services EEIG provides no client services. Such services are solely provided by the member firms in their respective jurisdictions.

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