The evolution of legislation and tax regulations in China and the features that exist at the local level is rapid, which involves keeping abreast of the latest laws in force. Here is a reminder of the fiscal environment in China regarding the taxation of expatriates:
1) Payment of taxes
Foreigners, considered in a tax point of view, to be Chinese residents shall, upon entry into China, register with the municipal tax office of their place of work.
The documents required are:
– A passport and a valid visa;
– A letter of appointment;
– An application for registration form.
In China, the tax payment will occur at the time of the declaration and unlike the French system in which the taxpayer must complete their tax returns annually, China has a monthly statement.
The tax calculated is based on the portion of income from which is subtracted a tax deduction. This tax abattement is from 4800 RMB for foreign residents in China. The calculation of the income tax is the following formula: [(monthly income-deduction) x applicable rate] – quick deduction.
Take, for example, an expatriate whose tax is paid by the latter but the procedures are carried out by the employer. He receives a monthly salary of 50,000 RMB gross. The tax shall be: [(50 000 – 4800) x 30%] = -3.375 1085 RMB.
The tax calculation differs if the company pays tax on the income of the employee. In this case, the tax base will be reassessed upward since it is the employer who pays the tax and it is considered to be a taxable benefit for the employee.
2) The impact on individual taxation
First, the income tax depends on the place of residence of the employee tax under the provisions of the tax treaty signed between France and China in May 1984.The bilateral tax treaty provides for France-China the principle of the non double taxation.
Thus, a foreign employee may be exempt from paying tax on income in China if it meets the following three conditions:
– The employee resides in China less than 183 days per year
– The remuneration is paid by, or on behalf of an employer who is not established in China,
– And the burden of this remuneration is not borne by a Chinese establishment.
Thus, if the employee spends more than 183 days per year in China, it is taxed in China and its Chinese source income (that is to say, the income related to the exercise of his professional activity in China). After five years of residence in China, the taxpayer becomes taxable in China throughout its worldwide income. However, a stay abroad of thirty consecutive days can interrupt this period of five years, which then starts to run after this trip (this interruption of stay may be proved by evidence of visas, for example)
For tax revenues, China applies the system of monthly deduction of tax at source, meaning that the employer deducts directly from the salary amount the tax payable by the employee in respect of his remuneration (no later than the seventh day of the month following the payment of income). Accordance with Chinese law, the tax base includes salaries (including bonuses, expatriation bonuses), interest, rents, dividends received in China. Some fringe benefits, separate from salaries may be excluded from the tax base: the rent from the family home supported directly by the employer, expatriation allowances, travel costs in China and outside China (including the cost of return for holidays in France), the costs associated with the use of a vehicle, tuition fees for children (if appreciated by the Chinese tax authorities).
Thus, if the employee for a short mission (less than 183 days per year) is in principle subject to tax in France (tax resident living in France), the employee for a longer mission, the expatriate employee and the employee contracted under local law are generally taxed in China (staying more than 183 days per year in China, tax residence is then determined by China). In this case, not only the remuneration paid in China but also the compensation paid in France under occupation to China must be reported. In addition, even if the taxpayer has no tax residence in France, it may however be liable to French income tax in two circumstances: when collecting income from French sources as well as rental income, income from securities or when to keep her with a home in France.
Finally, since 1 January 2007, certain categories of taxpayers must complete, with the Tax Office of their place of work, an annual declaration of their income if their annual income is above 120,000 RMB (and if the taxpayer has spent the previous calendar year in China).
This declaration must be made before March 31 of each year and should be presented by the Office of Taxes, by Internet or by mail (Circular of the National Bureau of Tax of 6 November 2006). The declaration form is available on Internet (Chinese and English), accompanied by an explanatory note. It is an individual statement, it is the taxpayer, not the employer, to make the declaration.
Under these conditions, it belongs to every newcomer in China to inquire about the possibilities of organizing and, if necessary, to optimize aspects of their individual taxation to meet its obligations, the control system of the Office Taxes being strengthened, including for foreigners.
3) Fiscal Year
The tax year in China corresponds to the calendar year, that is to say, from 1 January to 31 December. Accumulated under the provisions of the internal rules of the Chinese and Chinese-French tax treaty, the French who stay in China for more than 183 days in a calendar year are taxable on their income that is the local Chinese source, that is say those which are paid as compensation for an occupational activity on the territory of China.
4) Schedule of the Income Tax
In principle, any foreign national working in China for more than 183 days and less than 5 years is taxable on its income from Chinese source, that is to say related to its business activities in China. Therefore, even if the employee receives all or part of the remuneration of the parent company of the subsidiary in which he works, he shall remain taxable on all the income provided they are related to its business in China. It is therefore necessary to optimize the taxation of such people.
Contrary to popular belief, the tax in China can be equal to or greater than the country of origin of the expatriate or detached. Not only does the tax rate can reach 45% of the taxpayer’s taxable income, but also the Chinese tax authorities shall take into account for the calculation of the tax base income of the individual regardless of household expenses which it is integrated, as may be the case in France, for example where a system of family quotient degreaser tax is based on the number of people in the household.
Before the arrival of the expatriate or detached in China, the employer and employee agreement often adhere to the principle of fiscal equalization, the employer thus supporting the tax difference between France and China.
Constituting part of the benefits package or expatriate may not be taken into account in calculating the taxable if they are fringe benefits paid by the company directly to the provider and whose expenses under reserve invoices, accounts will be integrated into the structure in China. This may be particularly the case for housing, car and driver available to the employee, the education of children, etc..
Allowances paid directly by the employee may be confused with income and are often considered part of the latter and should therefore be included in the tax base.