Announcement on Individual Income Tax Policies Relating to Foreign Income

(Issued by the Ministry of Finance and the State Administration of Taxation on January 17, 2020.)

Announcement of the MOF and SAT [2020] No.3

With a view to thoroughly implementing the PRC Individual Income Tax Law and the Implementing Regulations for the PRC Individual Income Tax Law (the IITL and Implementing Regulations), we hereby announce individual income tax policies relating to foreign income as follows:

1 . The following income is income sourced from outside China:

(1)  income derived from providing service, such as serving in a position, employment or performance of a contract, outside China;

(2)  income derived from author's remuneration paid and borne by an enterprise or other organization outside China;

(3)  income derived from the licensing of various rights for use outside China;

(4)  production and operational activity related income derived from engaging in production and operational activities outside China;

(5)  interest, dividend and extra dividend income derived from enterprises and other organizations, as well as non-tax-resident individuals outside China;

(6)  income derived from the leasing of property to lessees for use outside China;

(7)  income derived from the transfer of immovable property located outside China, the transfer of stocks, equity and other equity-type assets (Equity Assets) arising from the investment in enterprises or other organizations outside China or from the transfer of other property outside China; however, if Equity Assets arising from the investment in an enterprise or other organization located abroad are transferred and at any time during the three years (36 consecutive calendar months) prior to such transfer at least 50% of the fair value of the investee enterprise's or other investee organization's assets directly or indirectly comes from immovable property located in China, the income so derived is income sourced in China;

(8)  casual income paid and borne by enterprises and other organizations, as well as non-tax-resident individuals outside China; and

(9)  if the Ministry of Finance and/or the State Administration of Taxation provide otherwise, matters shall be handled in accordance with relevant provisions.

2 . A tax-resident individual shall, in accordance with the IITL and Implementing Regulations, calculate the tax payable on his/her domestic and foreign income for the period in question by the following calculation methods:

(1)  his/her integrated income sourced from outside China shall be consolidated with his/her domestic integrated income to calculate the tax payable thereon;

(2)  his/her business income sourced from outside China shall be consolidated with his/her domestic business income to calculate the tax payable thereon; his/her taxable income from China or another country (or region) may not be deducted from losses on business income sourced from outside China calculated in accordance with relevant provisions of the IITL and Implementing Regulations, but business income from subsequent years sourced from the same country (or region) may be used to make up such losses in accordance with Chinese tax laws; and

(3)  his/her interest, dividends and extra dividend income, property lease income, property transfer income and casual income (Miscellaneous Income) sourced from outside China may not be consolidated with domestic income and the tax payable thereon shall be calculated separately for each.

3 . A tax-resident individual shall be permitted to credit the income tax amount paid outside China on income sourced from outside China in one tax year pursuant to the tax laws of the country (region) from where the income is sourced against his/her tax payable for the tax year in question to the extent of his/her credit limit.

The tax payable on the integrated income, business income or Miscellaneous Income sourced by a tax-resident individual from one country (region) is his/her credit limit and is calculated by the following formulas:

(1)  credit limit for integrated income sourced from one country (region) = tax payable on integrated income calculated from the integrated income from inside and outside China in accordance with Article 2 hereof × the amount of integrated income sourced from the country (region) in question ÷ total amount of integrated income from inside and outside China;

(2)  credit limit for business income sourced from one country (region) = tax payable on business income calculated from the business income from inside and outside China in accordance with Article 2 hereof × the taxable income on the business income sourced from the country (region) in question ÷ total taxable income on the business income from inside and outside China;

(3)  credit limit for Miscellaneous Income sourced from one country (region) = tax payable on the Miscellaneous Income from the country (region) in question as calculated in accordance with Article 2 hereof; and

(4)  credit limit for income sourced from one country (region) = credit limit for integrated income sourced from the country (region) in question + credit limit for business income sourced from the country (region) in question + credit limit for Miscellaneous Income sourced from the country (region) in question.

4 . The term "allowable tax credit for foreign income tax" means the amount of income tax-type tax payable and actually paid by a tax-resident individual on the foreign income derived by him/her in accordance with the tax laws of the country (region) from which such income was sourced. Allowable tax credit for foreign income tax shall exclude the following:

(1)  foreign income tax amounts that, in accordance with the foreign tax laws, were mistakenly paid or mistakenly levied;

(2)  foreign income tax amounts that are not leviable pursuant to an agreement for the avoidance of double taxation entered into by the Chinese government or the arrangement for the avoidance of double taxation executed by mainland China and Hong Kong or Macao (Tax Agreement);

(3)  interest, late payment fines or penalties paid due to insufficient or late payment of foreign income tax;

(4)  actual refunds or compensation of foreign income tax obtained from the foreign tax levying subject by a payer of foreign income tax or an interested party thereof; and

(5)  foreign income tax amounts of foreign tax burdens on which tax has been exempted in accordance with China's IITL and Implementing Regulations.

5 . If income derived by a tax-resident individual from a country (region) with which China has entered into a Tax Agreement is eligible for a tax reduction or tax exemption in accordance with the tax laws of the country (region) in question and the amount of such tax reduction or exemption shall, pursuant to the sparing provisions of such Tax Agreement, be deemed to be paid tax and credited against the tax payable in China, the amount of such tax reduction or exemption may be treated as foreign income tax actually paid by the tax-resident individual for which he/she may file for a tax credit in accordance with provisions.

6 . If the income tax amount actually paid by a tax-resident individual on income sourced from one country (region) in a tax year is less than the credit limit for the income of the tax year in question sourced from the country (region) in question as calculated in accordance with Article 3 hereof, the credit shall be applied with the actual tax paid treated as the credit amount; if the income tax amount paid exceeds the credit limit for the income of the tax year in question sourced from the country (region) in question, the credit shall be applied to the extent of the limit, and the credit for the excess amount may be carried forward and applied to the following five tax years.

7 . Where a tax-resident individual derives income from outside China, he/she shall file tax thereon between March 1 and June 30 of the year following the one in which the income was earned.

8 . A tax-resident individual who earns foreign income shall file his/her tax with the competent tax authority of the place in China where the entity in which he/she serves or by which he/she is employed is located. If he/she does not serve in or is not employed by an entity in China, he/she shall file his/her tax with the competent tax authority of the place where his/her registered permanent residence or place of usual residence in China is located. Where his/her registered permanent residence differs from his/her place of usual residence in China, he/she shall select the competent tax authority of one of them to file his/her tax. If he/she does not have a registered permanent residence in China, he/she shall file his/her tax with the competent tax authority of his/her place of usual residence in China.

9 . If the foreign tax year in which a tax-resident individual earns foreign income is different from a calendar year, the calendar year in which the last day of the foreign tax year in which the foreign income is earned falls shall be the corresponding Chinese tax year for the foreign income.

10 . When a tax-resident individual files for a foreign income tax credit, he/she shall, unless otherwise provided, provide a proof of tax payment issued by the foreign tax levying subject for the year in which the tax was paid, such as a tax payment document, a tax payment receipt or a tax payment record.  He/she may not apply the credit if he/she fails to provide a qualified proof of tax payment.

If a tax-resident individual has filed his/her foreign income without applying the tax credit and in subsequent tax years he/she obtains proof of tax payment and files for a foreign income tax credit, he/she may apply the credit retroactively to the tax year when the foreign income was earned, but may not go back more than five years.  If a change in the actual tax amount paid indicated on the proof of tax payment for the tax year in which the tax was paid issued by the foreign tax levying subject occurs within five years of the foreign income in question being earned, the payment or refund of tax shall be carried out after calculating the amount thereof anew based on the actual tax amount paid, without a late payment fine being charged or interest being refunded.

If a taxpayer is genuinely unable to provide a proof of tax payment, he/she may carry out foreign income credit matters on the strength of his/her foreign income tax return (or tax payment notice confirmed by the foreign tax levying subject) and the corresponding bank payment receipt.

11 . If a tax-resident individual is posted abroad to work by a domestic enterprise, entity or other organization (the Posting Entity) and his/her wage/salary income or service remuneration income is paid or borne by the Posting Entity or other domestic entity, the Posting Entity or other domestic entity shall withhold tax in accordance with the IITL and Implementing Regulations.

If a tax-resident individual is posted abroad to work by a Posting Entity, his/her wage/salary income or service remuneration income is paid or borne by an offshore entity and the offshore entity is a Chinese organization for which he/she serves or is employed abroad (Chinese Organization), such Chinese Organization may withhold the tax and entrust the Posting Entity to file the tax with the competent tax authority.  If the Chinese Organization does not withhold the tax or the offshore entity is not a Chinese Organization, the Posting Entity shall submit information on the posted individual to its competent tax authority by February 28 of the following year, including his/her name, type and number of his/her identity document, his/her position, the country or region to which he/she is posted, the name and address of the offshore entity for which he/she is working, the term of his/her posting, as well as details of his/her domestic and foreign income and payment of tax.

Chinese Organizations include enterprises, public institutions and other economic organizations in China, as well as offshore branches, subsidiaries, embassies (consulates) and representative offices that are under state authorities.

12 . If foreign-sourced income earned by a tax-resident individual or income tax actually paid by him/her abroad is denominated in a currency other than the renminbi, the same shall be translated in accordance with Article 32 of the Implementing Regulations for the PRC Individual Income Tax Law.

13 . If a taxpayer or withholding agent fails to file, and pay or withhold individual income tax on foreign income or submit information in accordance herewith, the matter shall be handled in accordance with relevant provisions such as the PRC Law on the Administration of the Levy and Collection of Taxes, the IITL and Implementing Regulations, and the same shall be made subject to individual tax payment credit administration.

14 . This Announcement shall apply to tax treatment matters for the year 2019 and beyond.  Tax amounts not fully credited during previous years may be handled in accordance with Article 6 hereof. The following documents or document provisions shall be repealed simultaneously:

(1)  Article 3 of the Ministry of Finance and State Administration of Taxation, Circular on Issues Concerning the Levy of Individual Income Tax on Income from Personal Stock Options (Cai Shui [2005] No.35);

(2)  the State Administration of Taxation, Circular on Several Issues Concerning the Levy of Individual Income Tax on Foreign Income (Guo Shui Fa [1994] No.44); and

(3)  the State Administration of Taxation, Circular on the Issue of How to Translate the Foreign Currency Income of Enterprises and Individuals into Renminbi and Calculate and Pay Tax Thereon (Guo Shui Fa [1995] No.173).