Simple Tax Guide for Americans in China

US Expat Taxes - China

At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and permanent residents working in China for over 4 years. Our clients hail from all parts of the country - Shanghai and Beijing, Guangzhou and Shenzhen, Tianjin and Chongqing.

As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.

We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS. 

The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.

As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in France for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.

There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.

We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.

Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax; we look forward to working with you.

Below we include information on the Chinese Tax System for the American Expatriates.

China has a multi-tiered system of tax liabilities for foreigners, which has led to some confusion, particularly over the so-called 90 or 183 days rule. For those sent to China by a foreign company, who have their salary paid elsewhere (probably in their home country), and spend more than 183 days of a calendar year in China (or 90 if they are from a country that does not have a double tax treaty with China), they need to pay IIT in China based on the number of days they effectively spent in the country.

New-to-China expatriates with full time employment here need to make sure they are in compliance. The onus is on the individual to ensure this and fines can be levied and passports censured if this is not carried out. Newcomers need to obtain a work visa, residence permit and register for tax upon commencing or signing contracts. The employer should arrange this for the employee. This is a serious issue and only gets potentially worse every month it is ignored. At some point, when an individual's stay in China ends, they will have to reconcile with the authorities over their income. Immigration records, visa type and length of stay information are shared between the immigration authorities and the tax bureau.

The Chinese government regards individuals as tax residents when they have stayed in China for more than five years without residing outside the PRC for more than 90 days cumulatively each calendar year or 30 consecutive days within a single calendar year. A tax resident is required to pay IIT on their worldwide income without limitation of source, meaning that income elsewhere related to property rentals or interests will also needs to be declared to the Chinese tax authorities. The taxes paid overseas can be deducted from the taxes payable to the Chinese tax authorities.

Individuals in China with annual incomes in excess of RMB120,000 need to complete and submit an annual self-declaration of their income earned in 2009 by the end of March 2010. This Individual Income Tax Declaration Form needs to be completed and submitted to the local tax authority in addition to regular routine monthly tax filings by taxpayers with and income in excess of RMb120,00 or any other the other following conditions: income derived from two or more places inside the People's Republic of China; income derived partly or fully from sources outside the People's Republic of China; those who have received taxable income but not paid tax; as well as other conditions regulated by the State Council.

This is a mandatory obligation for those who qualify. Regardless of if the individual has declared and paid the correct individual income tax on a monthly basis, they still must complete self-declaration of their 2009 income to the tax authorities.

Information that needs to be given of for the declaration includes: name, ID type and number, profession, employer, place of residence, address in China, post code and telephone number, as well as tax data such as the annual amount of any different sourced incomes, taxes payable, taxes prepaid and withheld, foreign tax credit and taxes owed or overpaid. In addition, foreigners should declare their nationality and date of arrival in China.

The office where the forms need to be filed is dependent on the situation of the individual making the declaration. Taxpayers employed within China need to file their declarations at the local tax authorities of the place where their employers are located. Taxpayers with two or more employers within China need to file their declaration at a fixed local tax authority in the place where one of the employers is located. Taxpayers with no employer in China, and whose annual income includes money from production or business operations by individual households engaged in industry and commerce, or money from contracting or leasing operations of enterprises or institutions, should file their declaration form at the local tax authorities in the place where one of these businesses are located. Taxpayers who have no employer in China, and whose annual income does not include any money from the aforementioned production or business operations, should file with the local tax authorities in their place of residence.

Annual income includes: wages and salaries, income from production or business operation conducted by self employed industrial and commercial households, income from contracted or leased operation of enterprises or social service providers partly or wholly funded by state assets, remuneration for providing services, author's remuneration, royalties, interest dividends and bonuses, income from lease of property, income from transfer of property, incidental income and other income.

Tax rates and liabilities

The first RMB4,800 of an expatriate's earnings in China is tax free (there are benchmarks at local tax bureaus on what a reasonable salary is in certain industries and this could vary with position, educational background and nationality). Local authorities have the power to increase declared salaries should they determine that a salary is manifestly low or inadequate to the position. To determine if someone is deliberately reducing their salary figures to escape a higher IIT threshold, they may demand to see concrete proof of earnings elsewhere. China's IIT rates are high compared to many countries worldwide.

China is reasonable regarding non-taxable elements of an expatriate package, but attention should be paid to the structuring of the inclusive package certain items need to be properly defined in the employment contract. The key issue is not whether the company or the individual pays such expenses, but whether the full amount of any such allowance, as stated in the contract, is actually used. For example, if an individual receives a housing allowance of RMB5,000 from their employer, but only RMB3,000 is used for rent (an invoice from the landlord is needed for proof), then the remaining RMB2,000 is taxable.

It is important to note that income sourced externally from China may be tax exempt from IIT (note, this does not apply if your salary is part paid in China and part overseas, under such circumstances the complete salary must be declared). In addition, basic endowment insurance, government-regulated basic medical insurance, unemployment insurance and housing funds paid by the taxable individual's employer and the taxable individual himself may also be tax exempt.

Issues of note for expatriates living in China

Expatriates who are not usually residents of China, but have lived in China for at least one full year, and whose income has derived from sources within China are subjected to individual tax and have the legal responsibility to complete the annual tax return. However, an expatriate who holds the position of senior manager in a Chinese domestic enterprise is subject to individual income tax on China sourced income, even though their “actual working period” within China did not exceed 90 or 183 days, dependent upon whether or not their country of nationality has or does not have a double tax treaty with China. Regardless of tax treaty, all such personnel should also complete an annual self-declaration.

Expatriates who have lived in China for more than one year, but no more than five years are required to report the salary or wages excluding income which has derived from sources outside China such as commercial or industrial income. The company is obligated to process monthly IIT filings on behalf of the expatriate employee. However, expatriates have the responsibility to complete the annual income tax self-declaration.

Individuals who have paid tax promptly but who do not complete the annual self-declaration may face a personal tax audit by the tax bureau and a potential tax fines risk for late tax filing.

China Income Tax

China income tax rates are progressively between 3% - 45%, shared out on 7 brackets:

• Tax exemption: 5000 RMB for both residents and non-residents.
• Common deductions: most wage earners may be deduct state-run pensions, medical insurance, and unemployment insurance, all three of which are regularly withheld from pay; some wage earners may also deduct a housing allowance
• Taxable income = income - tax exemption
• Monthly tax formula: (taxable income * tax rate) - quick deduction = tax
• Example: ((10000 - 5000) * 10%) - 210 = 290 RMB in taxes

Note that both, tax rate and quick deduction, are based on the 'income' AFTER the 'tax exemption': the 'taxable income'.

BUSINESS INCOME

Income from business operations shall be subject to a progressive tax rate of 5 levels. It is applicable to divide the income from production and operation of individual industrial and commercial households, which is calculated on an annual basis and prepaid on a monthly basis, and the annual taxable income of enterprises and institutions contracted or leased for operation into five classes, with the lowest class being 5% and the highest class being 35%.

OTHER TAXABLE INCOME FOR IIT PURPOSE

Individual income tax on income from interest, dividends and bonuses, income from lease of property, income from transfer of property, contingent income and other income shall be levied on a piecemeal basis, at a proportional tax rate of 20%.

Basis A resident individual, i.e. an individual "domiciled" in the Chinese Mainland, is subject to individual income tax on his/her worldwide income. Most nonresidents or residents of less than 1 year are subject to personal tax only on income sourced in China. Non-domiciled individuals staying in China for more than 1 year but less than 5 consecutive full tax years are subject to individual income tax on Chinasource income, plus foreign income actually borne by Chinese entities or establishments.

Non-domiciled individuals staying in China for more than 5 consecutive full tax years are taxed on worldwide income.

Residence The test for residence in China is whether an individual is usually or habitually residing in China due to household, family or economic involvement.

Filing status Each individual must file a separate return; joint filing is not permitted. All individuals, except for PRC nationals, generally must register with the Chinese tax authorities as soon as they become liable to individual income tax.

Taxable income  Taxable income comprises employment income; production and business income; income derived from contracting for, or leasing operations of, enterprises or institutions; dividends and bonuses; interest income (except interest from bank deposits); royalty income; income from leasing property; income from the assignment or transfer of property; contingency income; unemployment insurance premiums paid by an enterprise in excess of the premium rates specified by law; and other income specified as taxable by the finance department of the State Council.

Capital gains Gains derived from the sale of property, net of relevant expenses and taxes, are subject to tax at a rate of 20%. Gains on the sale of real property are also subject to Land Value Added Tax. Individuals are generally exempt from tax on gains from the sale of their sole private dwelling if they have occupied the residence for 5 years. Income from currency trading (i.e. the purchase and sale) over the internet is subject to a 20% tax.

Deductions and allowances Deductions and allowances are available depending on the category of income. For wages and salaries received in the PRC, individuals are entitled to a fixed monthly deduction of RMB 2,000 (foreign nationals are entitled to an additional fixed deduction of RMB 2,800). Personal basic contributions are deductible for domestic individuals. These include payments to housing funds and certain medical insurance, pension and unemployment insurance payments.

Tax Rates Nine progressive tax rates ranging between 5% and 45% are levied on wages and salaries. Dividends, royalties, income from leasing property, income from the transfer or assignment of property, income from manuscripts and contingency income are taxed at 20%. Interest on bank deposits is temporarily exempt from individual income tax (previously taxed at 5%). Income from personal services is subject to progressive rates up to 40%.

Stamp duty Stamp duty at varying rates applies to contracts, agreements and certain documents.

Capital acquisitions tax No

Real property tax An individual who rents out his/her own property is subject to urban real estate property tax. The rates vary across China since they are determined by the local authorities.

Inheritance/estate tax  No

Net wealth/net worth tax  No

Tax year Calendar year

Filing and payment Individual income tax on wages and salaries is calculated and levied on a monthly basis. Withholding agents and individuals who lodge returns personally must submit tax a return to the tax authorities and make their tax payments to the State Treasury within 7 days after the end of the month in which the income was derived.

Annual filing is required within 3 months of the end of the tax year for individuals who have resided in the PRC for a full tax year and whose annual income exceeds RMB 120,000.

In most cases, an employer or a person who pays taxable income to a taxpayer is obliged to act as a withholding agent and is responsible for filing a tax return and remitting tax payments to the tax authorities on behalf of the individual taxpayer. If there is no withholding agent, the individual is responsible for filing his/her tax return and paying the tax assessed.

Tax Penalties A late payment surcharge will be imposed on a daily basis at the rate of 0.05% of the amount of underpaid tax. Further penalties may be imposed in addition to the late payment surcharge.

China Value Added Tax

The new VAT rates came into force from April 1, 2019:

• The 16 percent VAT rate, which applies to the manufacturing sector, was lowered to 13 percent;
• The 10 percent rate, which applies to construction and transport, was lowered to nine percent; and
• The six percent rate, which applies to services, remains the same, but more deductions for the bracket are introduced.

Moreover, from April 1, 2019 to December 31, 2021, taxpayers in the service sector – which is the six percent VAT bracket – are be able to enjoy an addition input VAT deduction of 10 percent.

Registration A company is required to register with the local tax authorities at the time of incorporation to have its status recognised. If the taxpayer's status is approved, VAT taxpayers (other than small-scale VAT taxpayers) must register for VAT purposes with the tax authorities. A non-Chinese resident company is not allowed to register for VAT.

Filing and payment VAT returns must be filed each calendar month and submitted before the 15th of the following month Taxpayers importing goods must pay tax within 15 days after the issuance of the tax payment certificate by Customs.

Other  China imposes 2 other notable indirect taxes: the Business Tax and the Consumption Tax. The Business Tax is a non-recoverable turnover tax imposed on the provision of certain services, the assignment of intangible assets and the sale of immovable property within China. Tax Rates are 3%-5% withheld at source for most services, although a 20% rate applies to entertainment.

Once the taxpayer's tax status has been approved by the tax authorities, the company should register as a Business Tax payer.

Returns must be filed each calendar month and submitted before the 15th of the following month.

The Consumption Tax applies to alcohol, cosmetics, diesel fuel, fireworks, jewellery, motorcycles, motor vehicles, petrol, luxury watches, tobacco, tires, golf equipment, yachts, etc., at rates ranging from 3%-45% of the value of the goods. Once the taxpayer's tax status has been approved by the tax authorities, the vendor should register as a Consumption Tax payer. Returns must be filed each calendar month and submitted before the 15th of the following month.