China's five-year tax rule for foreigners is something that most of you have heard about but often is not fully understood. In short, regardless of whether you are teaching English, do your own business or work for one of the big multinationals, as long as you stay in China for a prolonged period of time, you are likely to have to take action to avoid being subject to worldwide tax in China.
Who are subject to Chinese tax?
To determine whether a foreign individual working in China is subject to Chinese tax, it is necessary to look at:
(1) How long does he or she has spent in China?
(2) What is the source of his or her income?
(3) Where is his or her employer based?
Income sourced within/outside of China is determined by the individual’s actual working period within China, regardless of whether the employer paying the income is based in China or not.
Five-year Tax Rule
A foreign individual who has resided in China for more than five years continuously may face new Individual Income Tax (IIT) liabilities identical to those of a resident individual of China, depending on the duration of his/her residency in China starting from the sixth year.
(1) If a foreign individual resides in China for one year in the sixth or any following single year, he/she would be considered a resident individual under the IIT Law and therefore liable for IIT on income received globally for that specific tax year.
(2) If the individual resides in China for less than one year in the sixth or any following single year, he/she is subject to IIT on only China-sourced income, and the One-year Rule applies.
The rule specifically states that the relevant period is “five full consecutive years” with a full year being classified as the Chinese fiscal year from January 1 to December 31.
Once the five-year rule has been triggered the ability to reset the clock to zero becomes much more onerous. If in the sixth year onwards the expatriate leaves China for more than 30 days consecutive or 90 days cumulative, it would mean that they have broken tax residency for the year, but will not have reset the five-year clock. This results in the expatriate having to do the same the next year in order to prevent worldwide taxation in China.
Contact Us
If you have further inquires, please do not hesitate to contact Tannet at anytime, anywhere by simply visiting Tannet’s website english.tannet-group.com, or calling Hong Kong hotline at 852-27826888 or China hotline at 86-755-82143422, or emailing to tannet-solution@hotmail.com. You are also welcome to visit our office situated in 16/F, Taiyangdao Bldg 2020, Dongmen Rd South, Luohu, Shenzhen, China.
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