CHINA's State Administration of Taxation (SAT) in 2010 published commentaries to Chinese double taxation arrangements (DTAs), which have Chinese tax impact on international secondment arrangements. This article provides general information about China's individual income tax (IIT) on expatriates' employment income from international secondment.

International Secondment

It is common that foreign companies send employees to China to conduct business activities on a secondment basis . Under China's DTA commentaries, i f a parent company of a DTA jurisdiction assigns personnel to a subsidiary in China , the activities implemented by the assigned personnel for the subsidiary do not create a permanent establishment (PE) for the foreign parent company in China if the personnel are hired and controlled by the subsidiary and their work responsibilities and risks are undertaken by the subsidiary. However, those personnel will be regarded as working for the foreign parent company (rather than for the subsidiary), and the foreign parent company may trigger a PE in China, if the parent company:

++ has the right to instruct the personnel and takes the risk and responsibility for personnel;

++ decides the number and standards of the personnel;

++ bears the personnel's salaries; or

++ earns profits from the subsidiary as a result of the assignment of the personnel.

If those people work for the foreign parent company, then the parent company should charge service fees from the subsidiary at arm's length. In that case, the subsidiary may be allowed to deduct those service costs if the costs are confirmed by the tax authorities to be reasonable. If the parent company's activities in China through the engaged personnel create a PE in China, then the profits attributable to the PE may be subject to the Chinese enterprise income tax (EIT) and the personnel may be subject to Chinese IIT.

Individuals

Individuals who may be subject to Chinese IIT include those (resident individuals) who are domiciled in China and are not domiciled in China but have lived in China for one year and those (nonresident individuals) who are not domiciled in China but have lived in China for less than one year. An individual is domiciled in China if he habitually resides in China because of household registration, family, or economic interests. An individual who temporarily resides outside China with the purpose of studying, working, visiting family, or touring is also treated as being domiciled in China if he returns to China after the completion of the matter.

An individual will be regarded as having lived in China for one year if he has lived in China for 365 days in a tax year concerned. H owever, in determining whether an individual has lived in China for one year, a temporary, continuous 30-day absence from China or an aggregate absence of 90 days in the tax year is not deducted from the 365 days. A tax year starts on January 1 and ends on December 31 under the Chinese IIT regime.

Principle of Income Source

Employment income derived by an individual during his working period in China is treated as Chinese-source income regardless of whether it is paid by a Chinese or foreign employer. Similarly, employment income earned by an individual during his working period outside China is regarded as foreign-source income regardless of whether it is paid by a Chinese or foreign employer.

Scope of Employment Income

Employment income covers various income earned by an individual from employment, including wages, salary, bonuses, year-end additional salary, allowances, subsidies, and other income related to the employment.

Scope of Tax Liability

A nonresident individual is subject to Chinese IIT on his Chinese-source income. Also, a nonresident individual who is not domiciled in China but has lived in China for not more than 90 days (or 183 days if a DTA applies) in tax year concerned (or in a stipulated period under the DTA ) is exempt from IIT on his Chinese-source income that is neither paid by an entity or individual located in China nor borne by a permanent establishment in China.

A resident individual is subject to Chinese IIT on his worldwide income. S ubject to the approval of the competent tax authorit y , a resident individual who is not domiciled in China but has lived in China for more than one year but less than five years is exempt from IIT on his foreign-source income paid outside China.

The following table lays out the scope of IIT liability that expatriates may incur in China from their Chinese-source salaries.

Note 1: Under China's DTA commentaries, a resident of a DTA jurisdiction is generally exempt from Chinese IIT on his Chinese-source employment income if the following conditions are met:

++ he is present in China for a period or periods not exceeding 183 days in total within any 12-month period;

++ the remuneration is paid by, or on behalf of, an employer who is not a Chinese resident; and

++ the remuneration is not borne by a PE or a fixed base that the employer has in China.

Employment income earned by an expatriate from an enterprise or a PE in China is regarded as employment income paid by the enterprise or borne by the PE in China if the enterprise or PE calculates EIT using a deemed profit method or is not subject to the EIT because of no business revenue, according to Guoshuifa [ 1994 ] 148. If a DTA applies and a PE is created, employment income borne by the PE in China refers to employment income already borne by the PE when it calculates EIT using an actual profit method, a deemed profit method, or a cost-plus method , according to Guoshuifa [1995] 155. However, China's DTA commentaries provide that the Chinese-source employment income derived by an expatriate of a DTA jurisdiction from his work for a PE of a foreign entity in China is deemed to be borne by that PE, regardless of how long he works in China or who pays the salaries, unless he performs temporary inspection, examination, or assistance activities for that PE through the assignment by the foreign entity.

The 183-day threshold applies if a DTA is applicable. For purposes of determining the 183-day threshold, a part of a day in which a resident is physically present in China will be treated as one full day of his presence in China, for example, arrival and departure days. The term "employer" is defined as a person who takes the right, responsibility, and risk for the results produced by the employee's work, determined by using the substance-over-form principle.

Note 2: During the period of performing duties, an individual who is not domiciled in China but acts as a director or a senior manager of an enterprise in China is subject to IIT on his directors' fees and employment income paid by the enterprise regardless of whether he performs duties outside China , according to Guoshuifa [ 1994 ] 148. Thus, the directors' fees and the employment income paid by the enterprise in China are taxable regardless of how many days he has lived in China and from where the fees and income are derived.

The term " a n individual who has lived in China for five years" means an individual who has lived in China for a period of five consecutive tax years, in each of which he has lived in China for one year. From the sixth year onwards, in any year if the individual lives in China for one year or less than one year respectively, he will be subject to IIT on his worldwide income or Chinese-source income accordingly for that year. If the individual lives in China for less than 90 days, he will be exempt from IIT on Chinese-source income paid by a foreign employer and not borne by a PE of the foreign employer in China for that year; moreover, a new five-year period will be recalculated starting from the year when he once again lives in China for one year.

Tax Rates

In China, tax rates applying to employment income are set on a progressive basis and range from 5 percent to 45 percent, depending on the amount of monthly taxable employment income earned by an individual. For an expatriate, the monthly taxable employment income amounts to the monthly total employment income minus CNY 4,800, in effect since January 1, 2006. The tax rates and related quick calculation deductions are set out in the following table .

Tax Calculation

Monthly Employment Income

For monthly employment income, IIT is calculated and paid on a monthly basis by using the following formula: IIT payable = monthly taxable employment income x applicable tax rate - quick calculation deduction. Except for annual one-time bonuses, any other bonuses (for example, semiyearly, quarterly, and overtime bonuses) are consolidated in the employment income of the current month for the purpose of calculating IIT.

Annual One-Time Bonus

Unlike other bonuses, annual one-time bonuses are treated as one-month employment income and taxed separately by using the following formula: IIT payable = annual one-time bonus x applicable tax rate - quick calculation deduction. The applicable tax rate and related quick calculation deduction are determined by the formula: annual one-time bonus divided by 12 months. The IIT calculation method can be used only once for each individual within a tax year , according to Guoshuifa [ 2005 ] 9.

Directors' Fee  

Directors' fee earned by an individual for a director's position is independent income and is therefore taxed based on the independent income category under Guoshuifa [1994] 89 , issued by t he SAT on March 31, 1994. On August 17, 2009, the SAT issued Guoshuifa [2009] 121 stating that the aforementioned IIT treatment only applies to directors and supervisors who don't have an employment relationship with the company for which they perform the duty of director and supervisor. The 2009 circular also states that an individual who performs employee and director or supervisor duties must include remuneration arising from implementing director or supervisor duties in his employment income and must compute his IIT using the employment income item.

Tax-Exempt Allowances

Subject to filing with and review by the competent authorities, an expatriate is provisionally exempt from IIT on the following allowances:

++ reasonable relocation allowance received on a reimbursement basis due to the employment in China or the termination of the employment;

++ reasonable housing, meal, and laundry allowances gained in a noncash form or on a reimbursement basis;

++ reasonable language training and children's education allowances incurred within China;

++ reasonable business traveling allowance inside and outside China; and

++ reasonable allowance for visiting family, which is restricted to the transportation expenses incurred by an expatriate between the place of employment in China and the place of his family (including the residence of his spouse or parents) up to twice per calendar year.

Reasonable relocation, housing, meal, laundry, language training, and children's education allowances within Hong Kong and Macau are also exempt from IIT provided that an expatriate employed by an enterprise in China lives in Hong Kong or Macau due to family reasons and commutes between China and Hong Kong or Macau every working day.

Timing of IIT Payments

IIT on employment income is withheld monthly and paid within seven days after the end of a calendar month concerned . An expatriate whose employment income is paid by a foreign employer and not borne by a PE in China may defer paying IIT and submitting tax returns until the length of his stay in China reaches 90 days (or 183 days if a DTA applies), provided that the expatriate cannot, in advance, foresee whether he will live in China for more than 90 days (or 183 days if a DTA applies) in the tax year (or in the period stipulated in the DTA).

Under China's IIT rules, a taxpayer who earns annual income of more than CNY 120,000 (about USD 18,349.30 or INR 820,716.00 ) in a tax year concerned is liable to file annual IIT returns within three months after the end of the tax year, unless otherwise he is not domiciled in China and the length of his stay in China within a tax year concerned is less than 365 days (a temporary, continuous 30-day absence from China or an aggregate absence of 90 days in the tax year is not deducted from the 365 days for such purposes).