China Expat Tax System – How Does It Work Now?

The seventh national population census revealed the number of foreigners living in China for more than three months rose to 845,697 in 2020, from 593,832 only 10 years earlier. In the first half of 2021, the National Immigration Administration approved 380,000 resident permits for expatriates.

Plans by Beijing to reform tax exemptions on expatriate employee allowances, which have since been on pause, have prompted some overseas businesses to consider moving all or part of their operations out of the country.

Here is what expat employees need to know about China’s individual income tax (IIT) regime

Who needs to pay individual income tax in China?

Chinese law stipulates that individuals who are domiciled in the mainland or live in the country for a total of 183 days in a tax year, will be categorized as tax residents. However, only after staying in the country for six straight years, without exiting for more than 30 days, will global income be taxed.

Non-residents pay taxes only on the income earned in China

Foreign experts recognized by the Chinese government are exempt from taxation, including United Nations staff and those working on UN aid projects. The same rules apply for people working in China under bilateral cultural and educational exchange programs paid for by foreign parties.

What kind of income is taxed in China?

The IIT levy applies to people earning wages, salaries, pay for authors or personal services, plus income from royalties, business operations, interest, dividends, and bonuses. Revenue from property leasing or transactions, as well as contingent income, is also taxed.

What is China’s individual income tax rate?

China implements a seven-tier progressive individual income tax system.

Do expats get any tax breaks in China?

Expatriate workers enjoy the same income tax rate and thresholds as Chinese nationals. The national threshold for income tax is 5,000 yuan (US$783) per month.

For now, expatriate taxpayers are entitled to special deduction items, including housing rental of up to 1,500 yuan per month, children’s education of up to 1,000 yuan per month, and continued learning of up to 400 yuan per month.

At the end of 2018, Beijing said tax breaks for expat allowances, including those available for language training, housing, and children’s education would be phased out at the beginning of 2022 after a three-year transition period.

But to help foreign businesses, the Ministry of Finance and the State Taxation Administration announced in late December the tax breaks will be extended for two more years.

Meanwhile, year-end bonuses will not be included solely in the month they are given, but split evenly across 12 months, before 2024. Equity incentives offered by listed companies will be taxed separately until the end of this year.