Tax guide for Americans in China

Resident vs. non-resident of China

The People's Republic of China classifies taxpayers into two main groups for individual income tax (IIT) purposes: residents and non-residents.

• Residents are subject to IIT on their worldwide income, which includes income earned both inside and outside China.
• Non-residents, on the other hand, are taxed only on their China-sourced income. This distinction provides a narrower tax scope, focusing solely on income earned within the country's borders.

Who can be considered a resident of China

Determining residency status in China depends on several criteria, primarily focusing on physical presence and domicile. An individual may be considered a resident of China for tax purposes under the following conditions:

• Individuals with a domicile in China, typically indicated by legal, family, or economic ties, are considered residents. This status applies regardless of the length of stay within a calendar year.
• Individuals who do not have a residence in China but who are present in the country for 183 days or more in a tax year are also considered residents. This criterion captures those who may not have permanent ties to China but spend a significant portion of the year within its borders.
• In certain cases, cumulative presence over several years may also affect residency status, particularly for individuals who frequently enter and exit China. Special rules apply, such as the "six-year rule", which considers individuals to be tax residents if they have been in China for 183 days or more per year for six consecutive years.

Types of taxation in China

China's tax system includes a variety of taxes that apply to both individuals and corporations. For individuals, the primary focus is personal income tax, which varies depending on residency status.

Personal income tax rates

For residents, comprehensive income includes wages and salaries, compensation for labor services, royalties, and royalty payments. This income is taxed at progressive rates that are applied to annual taxable income after taking into account allowable deductions and exemptions. The progressive tax rates for comprehensive income are as follows:

* renminbi

For non-residents, the IIT on employment income, remuneration for labor services, author's remuneration, and royalties is determined for each category, either monthly or per transaction, using the progressive tax rates:

Corporate income tax rates

In China, individuals who earn income from business activities, including sole proprietorships, sole proprietorships, and partnerships, are subject to individual income tax (IIT) on their business income.

The tax rates for business income are progressive, similar to those applied to overall income, but with specific brackets tailored to business activities:

Value-added tax

VAT is a broad-based tax that applies to the sale of goods, the provision of services, and the importation of goods in China. The standard VAT rates are as follows

13% Applies to most goods, including agricultural products, utilities, and certain services related to the sale of goods.
9% Reduced rate for essential goods and some services, including transportation, postal services, and basic telecommunications.
6% Applies to most services, including financial services and value-added telecommunications services.

Consumption tax

China's consumption tax is levied on certain luxury and energy-intensive goods, such as tobacco, alcohol, cosmetics, high-end jewelry, and automobiles.

Excise tax rates and calculation methods vary depending on the category of goods, with some taxes calculated based on quantity or value.

Tax on urban construction and maintenance

UCMT is levied on entities and individuals that pay VAT, consumption tax, and business tax in China. The tax is intended to fund the construction and maintenance of urban infrastructure. Rates vary depending on the location of the taxpayer:

7% For taxpayers located in urban areas.
5% For taxpayers in county and township areas.
1% For taxpayers in other regions.

Educational surtax

The education surtax in China is an additional levy imposed on entities and individuals already subject to VAT, consumption tax, and business tax.

This surtax is designed to support the funding of educational institutions and initiatives, reflecting the government's commitment to investing in the nation's education system.

The standard rate of the education surtax is 3% of the amount of VAT, sales tax, and business tax payable.

Local education tax

In addition to the national education surtax, China also imposes a local education tax at the regional level.

This surtax further supplements funding for local educational projects and infrastructure, allowing provinces and municipalities to address specific educational needs within their jurisdictions.

The rate of the Local Educational Surtax is typically set at 2% of the number of sales, use, and business tax payable.

Net wealth tax

China does not impose a net wealth tax on individuals or legal entities.

Real estate tax

Property tax in China is levied on property owners and is based on the ownership and use of real estate. The tax applies to both residential and commercial properties, with rates and exemptions varying depending on the location, type, and use of the property.

Generally, the property tax rate ranges from 0.4% to 1.2% of the property's assessed value or rental income, with specific rates set by local governments.

Urban and township land-use tax

The urban and township land-use tax in China is imposed on entities and individuals using land within cities, townships, and certain designated areas.

The tax rate varies depending on the location and specific use of the land, with higher rates typically applied in urban areas compared to rural or township areas.

The amount of tax payable is calculated based on the area of land occupied, with different rates applied per square meter, reflecting the economic value and level of development of the land.

Land appreciation tax

LAT in China applies to gains realized on the transfer or sale of land use rights and real estate. This tax is designed to capture the increased value of land over time, primarily due to development and improvements.

The LAT is progressive, with rates ranging from 30% to 60%, depending on the amount of appreciation realized at the time of transfer.

The tax is calculated on the difference between the sale price and the original cost of the land or property, including development costs, ensuring that significant gains from real estate transactions contribute to public revenues.

Deed tax

The deed tax in China applies to transactions involving the transfer of property ownership, including real estate sales, gifts, and exchanges.

The rate of the transfer tax generally ranges from 3% to 5% of the transaction value of the property, although specific rates may vary by locality and type of transaction.

Stamp tax

Stamp duty in China is levied on certain documents used in legal, business, and financial transactions. These include contracts, property transfers, business accounts, and licenses.

Rates vary depending on the type of document and range from 0.005% to 0.1%.

Motor vehicle acquisition tax

The vehicle acquisition tax in China is levied on the purchase of vehicles, including cars, motorcycles, and trucks. This tax is calculated as a percentage of the vehicle's purchase price, usually set at 10%.

Vehicle and vessel tax

Vehicle and vessel tax in China is an annual tax imposed on the ownership of vehicles and vessels, including cars, boats, and ships. This tax is based on the type and size of the vehicle or vessel, with rates varying accordingly.

Filing income tax returns in China

When to file tax returns

The timing for filing income tax returns in China depends on the type of income and the status of the taxpayer. Generally, the tax year in China follows the calendar year, running from January 1 to December 31. Important deadlines include:

• Employers are required to withhold and file tax returns on behalf of their employees every month, usually by the 15th of the following month.
• Annual reconciliation: Residents with comprehensive income may be required to file an annual reconciliation tax return. The filing period for the annual reconciliation is from March 1 to June 30 of the following year.
• Individuals who earn business income, rental income, or other types of taxable income that are not subject to withholding by an employer must file their tax returns and make any required payments every quarter or when the taxable transaction occurs.

How to file a tax return

Filing an income tax return in China involves several steps, which may vary depending on the individual's employment status and type of income:

• Most employees have their income tax withheld and filed by their employer. However, for annual reconciliation or to claim additional deductions or tax credits, individuals may need to file a return themselves.
• Chinese tax authorities have increasingly moved to digital platforms for tax filing. Individuals who are required to file a tax return independently can use the official website or mobile app of the State Administration of Taxation.
• In some cases, or by personal preference, taxpayers may file their returns at the local tax office. Required documents typically include identification, proof of income, and any relevant documentation for deductions or credits.

Penalties for late or incorrect filing

Failure to file a tax return on time or submitting incorrect information can result in penalties, including:

• Taxpayers who miss the filing deadline may be subject to a late filing penalty. This penalty is calculated as a percentage of the unpaid tax and accrues daily from the due date until the tax is paid.
• Filing inaccurate or incomplete tax returns can result in penalties. If the government determines that the mistake was due to negligence or an attempt to evade taxes, the penalties may be more severe, including a higher fine and possible legal consequences.
• If an annual reconciliation shows that too little tax was paid during the year, the taxpayer must pay the outstanding amount. Interest may be charged on the underpayment from the due date to the actual date of payment.

Social security in China

Social security in China is a comprehensive system designed to provide protection and assistance to employees in various life situations, including retirement, unemployment, medical emergencies, occupational injuries, and maternity.

The system is funded by contributions from both employers and employees, with rates and specific benefits varying by region due to the decentralized administration of social security funds.

The Chinese social security system consists of five main components:

• Pension insurance. Provides retirement benefits to employees who have reached retirement age and made the required contributions.
• Medical insurance. Provides coverage for a portion of medical expenses, including hospitalization, outpatient services, and prescription drugs.
• Unemployment insurance. Provides temporary financial assistance to individuals who have lost their jobs and are actively seeking employment.
• Workers' compensation. Provides compensation and medical care to employees who suffer an injury or illness directly related to their employment.
• Maternity insurance. Covers expenses related to childbirth and provides maternity leave benefits.

Tax deductions for expats in China

Expatriates living and working in China have access to several tax deductions that can significantly reduce their taxable income and, therefore, their tax liability.

Personal deductions from total income for residents

Expatriates who are considered tax residents in China - those who reside in the country for 183 days or more in a calendar year - are subject to tax on their worldwide income.

However, they are also entitled to personal deductions from their comprehensive income, which includes wages, salaries, bonuses, and other forms of compensation.

Standard basic deduction

The standard basic deduction for tax residents, including expatriates, is set at CNY 60,000 per year. This is equivalent to CNY 5,000 per month, which is automatically deducted from the individual's gross income before the tax payable is calculated.

The standard basic deduction is a straightforward way to reduce taxable income and does not require any special documentation or detailed calculations from the taxpayer.

Specific deductions

Expatriates, like local employees, are required to contribute to China's social security system, which includes pension, medical, unemployment, work-related injury, and maternity insurance.

The portion of an expatriate's income used to make these contributions is deductible from taxable income.

Contributions to the housing provident fund, a mandatory savings scheme for housing purposes, are also deductible.

Both employee and employer contributions to the fund are eligible for this deduction, up to the limits set by local regulations.

Specific additional deductions

The Chinese tax system allows for certain additional deductions that take into account various personal and family expenses. These deductions are intended to reduce the financial burden on taxpayers by taking into account essential living expenses and family responsibilities.

• Expenses related to the education of children, from preschool to higher education, are deductible.
• Expenses related to the taxpayer's continuing education, such as pursuing an academic degree or vocational training, are deductible.
• Out-of-pocket expenses for the taxpayer's or their dependents' serious health conditions are deductible, and subject to certain limits and requirements.
• Interest paid on loans for the purchase of a principal residence is deductible.
• Rent paid for the taxpayer's residence, particularly relevant for expatriates who may not own property in China, is deductible within certain limits.
• Expenses incurred in caring for elderly family members above a certain age are deductible.

Other allowable deductions

In addition to all of the above deductions, Chinese tax law provides other allowable deductions under certain conditions.

• Contributions to government-approved charitable organizations may be deducted up to a certain percentage of the taxpayer's annual income.
• Premiums paid for commercial health insurance that supplement major medical coverage may be deductible.
• Contributions to supplemental retirement plans over and above Social Security are another source of deductions.

Personal deductions from employment income for non-residents

Non-residents can take a standard basic deduction of CNY 5,000 per month from their gross earned income before tax is calculated.

Charitable contributions

The amount of charitable contributions deductible from taxable income is limited to 30% of the taxpayer's reported income.

Compensation for work performed, compensation for authorship, and royalties

Income from labor services, author's fees, and royalties are treated differently under the Chinese tax system, with specific rules governing the taxation of these types of income:

• Labor service income. This includes income from independent personal services. A deduction of 20% of the gross income is allowed to calculate taxable income, taking into account the costs and expenses associated with the generation of such income.
• Writer's compensation. Income from literary, artistic, or scientific works allows for a more generous deduction. In addition to the standard 20% deduction applicable to earned income, the author's remuneration benefits from an additional 30% deduction, recognizing the cultural and educational contributions of authors.
• Royalties. Royalty income, which includes payments for the use or right to use intellectual property, also qualifies for the 20% deduction from gross income. This deduction recognizes the effort and resources invested in creating and maintaining intellectual property.

Rental income

Deductions are allowed for expenses directly related to the generation of rental income. This can include property management fees, maintenance and repair costs, property taxes, and insurance premiums.

For simplicity, taxpayers may also elect to have a standard deduction rate applied to their gross rental income.

This rate varies but is designed to approximate the actual expenses incurred in generating rental income.

Business deductions

The main deductible expenses include:

• Costs directly related to the day-to-day operation of the business, such as rent, utilities, salaries, and raw materials, can be deducted.
• Depreciation of business assets, such as equipment and machinery, over their useful lives is also deductible.
• Expenses incurred in promoting the business are deductible in recognition of their importance in generating revenue.

Losses

Loss treatment in the Chinese tax system allows individuals and companies to carry forward losses incurred in one tax year to offset taxable income in subsequent years.

This provision is particularly important for corporations, providing financial relief in difficult times. Key aspects include

Business losses can generally be carried forward for a maximum of five years. This means that if a company suffers a loss in one year, it can use that loss to reduce its taxable income in each of the next five years, providing a longer window to recover from financial setbacks.

Losses from one source of income cannot be used to offset income from another source. For example, business losses cannot be used to offset rental or wage income.

The tax treaty between the US and China

The tax treaty between the United States and China is designed to prevent double taxation of individuals and corporations operating in both countries.

Signed in 1984 and effective in 1987, the treaty outlines the rules for taxing various types of income, including earned income, business profits, dividends, interest, royalties, and capital gains. Key provisions include:

• The treaty helps determine tax residency to determine which country has the primary right to tax the taxpayer's income.
• It defines what constitutes a permanent establishment, which affects how business profits are taxed.
• The treaty provides for reduced rates of withholding taxes on dividends, interest, and royalties paid by residents of one country to residents of the other, facilitating cross-border investment.
• Both countries allow tax credits or deductions for taxes paid to the other country, preventing the same income from being taxed twice.

Most popular tax forms for US expats

US expatriates, including those living in China, need to be familiar with several IRS tax forms to meet their annual filing requirements. The most common forms include

1. Form 1040: The standard individual income tax return that all US citizens and resident aliens must file, reporting their worldwide income.
2. Form 2555: Used to claim the Foreign Earned Income Exclusion (FEIE), which allows qualified expats to exclude a certain amount of their foreign-earned income from US taxation.
3. Form 1116: For claiming the Foreign Tax Credit (FTC), which reduces US tax liability by the amount of foreign taxes paid on income that is also taxed in the US
4. FinCEN Form 114 (FBAR): Required if a US person has a financial interest in or signature authority over foreign financial accounts exceeding $10,000 at any time during the calendar year.
5. Form 8938: Used to report certain foreign financial assets when the aggregate value exceeds the applicable reporting threshold.

China tax forms for US expats

US expatriates living in China must also navigate the Chinese tax system, which involves different forms and filing requirements. Important forms and documents include

1. Annual individual income tax settlement form: Used by expats who need to reconcile their annual tax liabilities or claim refunds for overpaid taxes. This form is essential for reconciling taxes withheld by employers with the actual tax liability based on total annual income and allowable deductions.
2. Foreign individual income tax form: For expatriates who earn income in China from sources such as employment, independent personal services, or property rental. This form is used to report various types of income and claim applicable deductions under Chinese tax law.
3. Tax residence certificate application form: Expats may need to apply for a tax residency certificate to claim benefits under the US-China tax treaty and to prove their tax residency status in China.

Understanding and correctly completing these forms is critical for US expats in China to comply with local tax laws, claim eligible deductions and credits, and avoid penalties for non-compliance.

Expats are often advised to seek professional tax advice to navigate the complexities of filing taxes in both the US and China.