PRC IITfor Expatriates and

Cross-Border Business Travellers

18th March 2010

Presented byKathy Siu – Principalkathy.siu@azuretax.com

Refresher on PRC IIT

Domiciled

Yes

Expatriates

IIT on WW Income Residence Status+

Source

No

PRC National

1

Domicile test

Taxpayer’s personal connection within China

- Usually or habitually resides in China due to:-

• household registration

• family ties

• economic relationship

(IITIR, Art

2)

2

Expatriates – What is the IIT liability?

Depends on

Residence Status

Source of Income

3

IIT Liability for Expatriates

Residence Status

> 5 full years Worldwide Income

Source of Income

> 1 year < 5 years

PRC sourced income + Non-PRC sourced

income borne by PRC entities

PRC sourced income

PRC sourced income that is

paid or borne by

an establishment in China

> 90 / 183days < 1 years

< 90 / 183days

4

IIT Exemption for Expatriates

+< 90 / 183 days

Remuneration costs not borne by a PRC entity or deemed to have been borne by an establishment in China

E.g. Permanent Establishment

Representative Office

5

IIT Exemption for Expatriates (Con’t)

1. Chief Representative of a Representative Office (“RO”)

- his costs are deemed to be borne by the RO and

therefore subject to IIT

Exceptions

2. Expatriates working on a project that is deemed as a PE in China

3. Expatriates employed by a China entity

6

Days Counting Rules

1. For counting 90 / 183 days purpose (include working and non-

working days)

Entry day – 1 day

Exit day – 1 day

Entry + exit same day – 1 day

7

Days Counting Rules (Con’t)

2. Counting actual working period for IIT calculation purpose

(working days only)

Entry day – 1/2 day

Exit day – 1/2 day

Entry + exit same day – 1/2 day

8

Example : John Smith, a Hong Kong resident, spent the following number of days in China in 2008 and 2009.

His working days are noted in blue colour

For counting 90/183 days purposes : 191 days (twelve months from 1.Oct.2008 to 30.Sep.2009)

For counting actual working period for IIT calculation purposes : 2008 – 37 days

2009 – 138.5 days

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

1½

43

65

1½

2018

2010

Days Counting Rules (Con’t)

2008 :

2009 :

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

108½

2019

2016½

109

2015

2015½

109

2018

2019

109

191 days (i.e. >183 days)

9

Days Counting Rules (Con’t)

3. One full year

If lived in China for 365 days in a calendar year

- Ignoring temporary absence from China:-

• Single trip of 30 days or less

• Multiple trips totalling 90 days or less

10

Days Counting Rules (Con’t)

4. Five full years

If lived in China for 5 full years consecutively, and each year’s temporary absence :-

• 30 days or less for single trip

• 90 days or less for multiple trips, in total

Subject to IIT on Worldwide Income from the 6th year if continue to

live in China

11

To break 5-year rule

Make one single trip > 30 days (excluding exit and entry days)

or

Multiple trips > 90 days (excluding exit and entry days)

In the 5th year

or

prior

In the 6th year Stay in China for < 90/183 days (Recalculate)

or

12

Filing obligations

• Tax registration with the local tax bureau, where taxpayer usually

resides or performs his employment duties

• Monthly filing and withholding, by 7th of the following month

• Annual filing by 3rd month after year end if taxpayer fulfilled one of the following:-

- also receives overseas income

- with annual income > RMB 120,000 & stayed in China for one full year

- 2 sources of employment in China

- with taxable income but no withholding agents

13

Progressive rates : from 5% 45% (9 tax brackets)

• Monthly deduction of RMB 4,800 for expatriates.

Portion of monthly taxable income (with gross-up)

Portion of monthly taxable income (without gross-up)

Tax rateQuick

Deduction

Up to RMB475 Up to RMB500 5% RMB0

RMB476–RMB1,825 RMB501–RMB2,000 10% RMB25

RMB1,826–RMB4,375 RMB 2,001– RMB 5,000 15% RMB125

RMB4,376–RMB16,375 RMB 5,001– RMB 20,000 20% RMB375

RMB16,376–RMB31,375 RMB 20,001– RMB 40,000 25% RMB1,375

RMB31,376–RMB45,375 RMB 40,001– RMB 60,000 30% RMB3,375

RMB45,376–RMB58,375 RMB 60,001– RMB 80,000 35% RMB6,375

RMB58,376–RMB70,375 RMB 80,001– RMB 100,000 40% RMB10,375

RMB70,376 and above RMB 100,001 and above 45% RMB15,375

IIT rates

14

Non-taxable income for expatriates

Reasonable BIKs on reimbursement basis supported by valid receipts:-

- PRC Housing rental

- Business travel expenses

- 2x home trip tickets for expatriate only

- Meal and laundry expenses

- Language training expenses

- Children education costs incurred in PRC

- Relocation and moving expenses

15

Non-taxable income for expatriates (con’t)

Example

Annual salary

Housing Allowance

Home leave

Child education

Language training

Total Package

USD

100,000

30,000

5,000

23,000

2,000

160,000

USD

Taxable 100,000

Non-taxable -

Non-taxable -

Non-taxable -

Non-taxable -

Total taxable income 100,000

Total package PRC IIT Taxable Income

16

Cross-border work arrangements

1. Frequent travelling into China

- Overseas employment contract

- No specific assignment

2. Secondment

- Second to a China entity for a specified period of time

- Defined job duties and job title in the China entity

3. PRC employment

- Employed by a China entity

- No overseas employment contracts

4. Dual employment contracts – HK and PRC employment contracts

- Two distinct roles, PRC role and Hong Kong role

- Two separate employment contracts

- But difficult to convince tax authorities17

To claim Income exemption

or

tax credit in Hong Kong

depending on each case

18

19

Days

Income sourced in China Income sourced outside China

Borne by Chinese entity

Borne by Overseas entity

Borne by Chinese entity

Borne by Overseas entity

< 90/183 days T NT NT NT

> 90/183 days

< 1yearT T NT NT

> 1year

< 5yearsT T T NT

> 5 years T T T T

IIT Implications on Cross-border employees

T = Taxable NT = Non-taxable

19

PRC – Time apportionment claim

Expatriates working in China may file monthly IIT on time apportionment basis if

all three conditions are met :-

• Concurrently holding a position with an entity outside China while

on China assignment / employment

• Required to spend some days during a month performing non-

China related duties outside China, and

• their non-China related wages would not be borne by a China entity

Total employment income (both China + Overseas) need to be reported and

IIT calculated fully. The total tax liability will then be prorated based on the

number of days physically spent in China.

20

Recent Updates

21

Directors’ fees

vs

Employment income

22

Directors’ fees

Previously :-

- taxable as “Personal Services Income”

at 20% up to RMB 20,000

Now:-

- taxable as salary + wages

at progressive rates from 5% to 45%

Guoshuifa [2009] 121 (“Circular 121”)

Effective from August 2009

23

Secondment

vs

Permanent Establishment

24

Secondment

- Secondees working under the supervision and control of the China

entity, carrying out activities that benefits the China entity.

- China entity borne the payroll costs of the Secondees

- IIT

Carrying out projects / providing services in China – P.E.

- Secondees in substance working under the supervision and control

of the Overseas employer, providing services to the China entity.

- Overseas company might be deemed as constituting a PE in China

- CIT

- BT

- IIT25

Double Pay

and

Annual Bonus

26

Double Pay

Previously :-

- Taxed separately as an additional month’s salary in the

month it is received (without any monthly allowable

deduction), not being topped up to the normal monthly

salary and taxed at higher marginal rate.

Now :-

- Topped up to the normal monthly salary and taxed at the

applicable marginal rate

Guoshuifa [2009] 121

Effective August 2009 27

Annual Bonus

Discretionary one-time annual bonus :

Taxed in the month of receipt

at preferential rate

to determine the top marginal tax rateAnnual Bonus

12

28

Guoshuihan [2009] No.694

• Qualified Plan

• Non-Qualified Plan

• Overseas Pension Plan e.g. MPF

Effective 10 December 2009

Enterprise Annuity Plan

29

Enterprise Annuity Plan (“Qualified Plan”)

IIT implications to Employee :-

Employer’s contributions

– taxable as employment income of the employee in the

month contributions are made

– taxed separately from the monthly salary with no

additional monthly allowable deduction

– Not deductible in calculating employee’s IIT liabilityEmployee’s contributions

30

Q & A

31