How the Individual Income Tax Reform Impacts Expats Residing in China?

March 12, 2019 | BY

Susan Mok

David Liu and Tianxiao Jin of FuJae Partners examine the major amendments to the Individual Income Tax Law, its Implementing Regulations and new supplemental tax circulars, and their impact on expatriate taxpayers

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China's Individual Income Tax Law (IIT Law) (中华人民共和国个人所得税法) and its Implementing Regulations, as amended, took effect on January 1, 2019. This finally puts an end to the uncertainties faced by expatriates working in or traveling frequently to and from China (excluding Hong Kong, Macao and Taiwan) for work (Expatriate Taxpayers).

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CHANGE TO THE RESIDENCE TEST 

Prior to the latest amendments to the IIT Law, Expatriate Taxpayers would be subject to IIT on their worldwide income if an individual, who does not hold a Chinese passport and/or household registration, lives in China for more than one year. However, the Implementing Regulations for the IIT Law (中华人民共和国个人所得税法实施条例) relaxed the rule by allowing the tax authority to choose not to tax Expatriate Taxpayers on their global income until after they have lived continuously in China for more than five years, hence the well-known five-year rule. Before the promulgation of the amended Implementing Regulations, the future of the five-year rule and when an Expatriate Taxpayer becomes a tax resident of China were uncertain, and there was a wide array of speculation as to what would happen to the old de facto residence test and the IIT exemption benefits that Expatriate Taxpayers enjoyed prior to the amendments to the IIT Law in August 2018.

Surprisingly, Article 4 of the amended Implementing Regulations of the IIT Law, which was issued by the State Council on December 18, 2018, has done away with the old five-year rule, and instead has introduced a more favorable and straightforward new residence test, i.e., an Expatriate Taxpayer would be subject to IIT on his/her worldwide income if he/she stays in China for more than 183 days each year, and continuously does so for six consecutive years (Six-year Continuous Residence). A period of Six-year Continuous Residence will be broken and re-counted if the Expatriate Taxpayer is temporarily absent from China for more than 30 days for a single trip in any calendar year before the Six-year Continuous Residence test is met. It is important to note that such breaking of the Six-year Continuous Residence works even though the Expatriate Taxpayer stayed in China for more than 183 days in the current and any of the previous years.

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The following table shows the difference between the old five-year rule and the Six-year Continuous Residence test.

Tax Residence Test for Expats Breaking Continuous Residence
Old Regs (2011) Five-year Continuous Residence Rule |
  • living continuously in China > five years; and
  • staying in China for 365 days each tax year (temporary absence from China will not be deducted).
 The counting of five consecutive years under the Five-year Continuous Residence Rule would start anew in the case of : |
  • temporary absence from China > 30 days on a single trip in any year; or
  • temporary absence from China > 90 days in aggregate in any year.
New Regs (2018) Six-year Continuous Residence Rule |
  • staying in China ≥ 183 days in aggregate each year; and
  • doing so continuously ≥ six years.
 The counting of six consecutive years under the Six-year Continuous Residence Rule will start anew in the case of: |
  • temporary absence from China > 30 days on a single trip in any year.

COMMENTARY

The Six-year Continuous Residence rule extends the grace period from five years to six years and provides a much simpler way for temporary absences within the Six-year Continuous Residence. This effectively eases the burden on the part of Expatriate Taxpayers in tracking their absence from China, and also simplifies the tax administration for the competent tax bureaus concerned, freeing up a lot of their time for other more important and pressing taxation matters.

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SUNSET PROVISIONS FOR SPECIAL BENEFITS ENJOYED BY EXPATS

Historically, under the rules on taxation of expatriates issued by the Ministry of Finance and/or the State Administration of Taxation pursuant to the old IIT Law and Implementing Regulations, Expatriate Taxpayers enjoyed a number of special IIT exemptions (Tax Benefits).

The following table summarizes the major Tax Benefits:

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