Last month, we discussed some common ideas for tax panning regarding individual income tax borne by the expatriate employees in China. Some of our clients, especially HR managers replied us that it is indeed useful, and they would like to know more about ways to define which type of foreign employees should pay tax for their income gained within or outside China. Today, we will focus on this question.
As the idea is to maximize income as well as minimize the payable income tax so that the actual benefit to the employee is maximized, figuring out which foreign employees must pay the tax to Chinese authority for their income is of great importance for tax planning.
We concentrate on the following factors in discussions with our clients in considering which employees must pay the income tax:
A. Whether the employees have residence within the territory of China;
B. For those who do not have residence in China, the duration of working and staying in China;
C. Was the income obtained within China or outside of China?
D. Was the income paid by domestic entity or foreign entity?
E. The role or position held by the expatriate employees, i.e. whether they are directors or senior managements employed by the enterprises within the territory of China enjoying the director-wages or remunerations.
All these factors are relating to define whether the expatriates are “Resident Taxpayers” or “non-resident taxpayers” according to Chinese Individual Income Tax Law (IITL), and when answered properly will give a clear answer to the question of whether an individual employee pay taxes on income obtained in and outside of China. Chinese law generally requires a Resident Taxpayer, who has domicile in China or who is present in China for more than one year without a domicile, to pay the individual income tax for any income earned within and outside of the territory of China. In Contrast, a “Non-Resident Taxpayer” will only be responsible for the income tax on income earned within the territory of China.