Along with the rapid development on international service trade and global communication, there are more and more foreign employees working in China based enterprises. How to make an appropriate salary plan for those expatriates becomes one of the most important questions for many of our clients’ companies. The general idea would be reducing the individual income tax as well as maintaining the total amount of income so that the actual gaining obtained by the expatriates will get higher and will then induce those foreign employees to continuously serving for the company.
Here are some useful tax planning ideas provided by our China Tax Lawyers as follows for expatriates working in China and gaining income from China and/or abroad.
A. Chinese tax authorities regard the duration of stay in China as one of the determining factors for calculating the income tax amount of expatriates. Generally speaking, expatriates need to pay more tax for their longer stay in China. Thus, we may choose to manage their stay duration in China in order to reduce their income tax. For example, for expatriates who are staying in China for long term (1year -5 years), a stay of over 30 days outside the territory of China or over 90 days accumulated days outside the territory of China (with multiple exits) will be free of income taxes during the time abroad.
B. In China, the income tax rate is scheduled according to different types of incomes, which means the income is classified into wages & salaries, labor remuneration, royalties, interests & dividends & bonuses, etc., and different tax rates and calculation methods are applied on different classes of income. Therefore, different amount of tax may be paid for same amount of income if the tax is calculated according to rate and calculation method of different class of income. Higher rated income may be modified into lower rated income if it is possible. For example, for foreign employees who are gaining high wages or salaries and are applying the tax rate of 25%, part of the incomes of wages or salaries amounts gained by expatriate may be categorized as labor remuneration because the tax rate levied on labor remuneration will be just 20%. Significant amounts of money may be saved for such foreign employees and the total amount of income would be remained as the same time.
C. According to Chinese regulations, some kinds of allowances, including housing, meal, moving and laundry, paid to the expatriates in non-cash form or in the form of being reimbursed by presenting formal invoices could be exempted from paying the individual income tax. Hence, in certain circumstances, wages, salaries or other types of income applying higher tax rates may be transformed into this kind of non-cash allowance, in order to lower the amount for calculating the tax. Then, the net income after tax could be increased as well as the total amount of income could be maintained.