Tax in mainland China

China residents are generally subject to tax on their China-source and non-China-source income. Non-residents are subject to tax on their China-source income only.

Effective from 1 January 2019, China residents include the following persons:

• individuals who have their domicile in China
• individuals who do not have their domicile in China but reside in China for 183 days or more in a tax year

China-domiciled individuals are subject to China individual income tax (IIT) on their worldwide income. Non-China-domiciled individuals who have resided in China for more than six consecutive years and who had no absence from China for more than 30 consecutive days in any of the six consecutive years are subject to China IIT on their worldwide income, regardless of the mode of payment and place of the income.

Employment income - The types of taxable compensation under the China IIT law include, but are not limited to, wages and salaries, foreign service or hardship allowances, cost of living and automobile allowances, tax reimbursements, bonuses and equity compensation. The form of the individual income may be cash, physical objects, securities and economic interests in any other form.

For employment income, non-China-domiciled individuals who are China tax residents for no more than six consecutive years are subject to China individual income tax (IIT) on income earned for services rendered in China and on income earned from services rendered outside China but paid or borne by the individual’s China employer.

Individuals who reside in China continuously or intermittently for not more than 90 days during a calendar year are treated in the following manner:

• the expatriate is exempt from IIT if the salary is paid and borne by an overseas employer
• employment income paid or borne by the employer’s establishment in China is subject to IIT to the extent that the income is attributable to services actually performed in China
• normally, employment income paid or borne by the employer’s establishment in China is apportioned to China and non-China services in accordance with the actual number of days the expatriate resides in China

Individuals who reside in China for more than 90 days but less than 183 days, are treated in the following manner:

• the expatriate is subject to IIT on employment income derived from services actually performed in China
• employment income attributable to services performed outside China is exempt from IIT. Normally the employment income is apportioned to China and non-China services in accordance with the actual number of days the expatriate resides in China

Notwithstanding the above, special treatment may be available for a foreign individual who serves in the senior management of a Chinese entity or for an individual who is a resident of a jurisdiction that has signed a tax treaty with China. Income paid and borne by an employer outside China with respect to these individuals is taxed in one of the following ways:

• the income is exempt from individual income tax if the individual resides in China for not more than 90 days during a calendar year (or for tax treaty expatriates, not more than 183 days during a calendar year or any 12-month period, depending on the relevant tax treaty terms)
  
• the income is subject to individual income tax if the period of residency in China extends more than 90 days during a calendar year (or for tax treaty expatriates, more than 183 days during a calendar year or any 12-month period, depending on the terms of the relevant tax treaty), to the extent that the income is attributable to services performed in China

Self-employment income - Taxable income includes compensation for independent personal services performed in China, bonus payments and income specified as taxable by the Ministry of Finance.

Except for individual proprietorship enterprises and individual equity partnership enterprises, no measures exist for the carryover of losses.

Investment income - Interest, dividends and other investment income from China sources are subject to tax at a flat 20% rate, with no deductions allowed.

Dividends, interest, royalties and rental income received by non-resident foreign nationals from China sources are normally subject to a 10% withholding tax under most double tax treaties entered into by China on the approval of the local tax authorities in charge.

Dividends paid by foreign-investment enterprises to foreign nationals in China are exempt from China IIT.

Directors’ fees - Directors’ fees are considered income from independent personal services and are taxed as income derived from labour services. However, directors’ fees paid to a company director are taxed as “wages and salaries” if they are an employee of that company or a related company. If the director is not also an employee of the company, their directors’ fees may be taxed under the “labour service” category.

Enterprise annuities – Under a tax circular that took effect on 1 January 2014, deferred taxation is provided to qualified annuity plans that are set up by enterprises in accordance with Chinese annuity regulations. Both employer and employee contributions are not subject to IIT if certain conditions are met.

Tax deferral – Effective from 1 May 2018, the Chinese government launched IIT deferral on commercial pensions in pilot areas including Fujian Province, Shanghai, and the Suzhou Industrial Park Zone. Under the trial program, individual contributions (capped at the lower of 6% of monthly salary or CNY1,000 a month) to qualified commercial pension plans can be deducted from taxable income when filing IIT returns.

Temporary relief - If the stock-holding period is longer than one month but no more than one year, and 100% of the income is exempt from IIT if the stock-holding period exceeds one year, only 50% of the income is chargeable to IIT. This is under a temporary measure for dividends and profit sharing derived by individuals from domestic listed companies.  Interest income derived by individuals from domestic banking institutions on deposits is also temporarily exempt from IIT.

Taxation of employer-provided stock options - Taxable income is recognised on the date an employee exercises an employer-provided stock option. For foreign nationals, stock option income attributable to China employment is considered China-source income.

If the stock option is taxable, the amount of taxable income is the difference between the fair market value of the stock on the exercise date and the exercise price.

After deducting costs and related expenses, income derived from the sale or transfer of movable or immovable property in China is taxed at a flat 20% rate.

Capital gains derived from transfers of shares listed on China stock exchanges in the secondary market are temporarily exempt from China IIT.

Foreign individuals are subject to a 20% tax on gains derived from the sale of equity in a foreign-investment enterprise in China (for example, an equity joint venture).

The applicable tax rate may be reduced for individuals resident in treaty countries.

Chinese nationals employed by China entities are subject to the social security system in China. Under the new China Social Security Law, which took effect on 1 July 2011, foreign nationals working in China must also participate in the China social security system. They must participate in basic pension schemes, basic medical insurance, work-related injury insurance, maternity insurance and unemployment insurance.

Social security tax rates vary among cities. Employers and employees are subject to social security taxes at an average rate of 25% and 11% of gross income, respectively. For this purpose, the amount of gross income is capped at three times the average salary in the city for the preceding year as published by the local government.

Foreigners must register with the local tax bureau or, if individuals are engaged in offshore oil and gas exploration activities, with the local offshore oil tax bureau.

Foreigners subject to China IIT may need to complete a tax registration form and provide an employer’s certification stating the amount of their compensation, along with copies of relevant passport pages to verify their date of arrival.

Although the recipient of income is responsible for payment of income tax, it is generally collected through a withholding system under which the payer is the withholding agent.

All taxpayers, including those earning China-source income but not covered by the withholding system, and employees who are paid outside China must file monthly income tax returns and pay the relevant tax to the local tax bureau. 

Chinese residents with foreign-source income must file annual reconciliation tax returns and pay tax due between 1 March and 30 June of the following year. Foreign taxes paid on this income are allowed as a tax credit, up to the amount of China IIT levied on the same income.

Individuals who are taxpayers are now required to register and file annual reconciliation tax returns between 1 March to 30 June with a tax bureau in charge if any of the following circumstances apply:

• an individual receives consolidated income in two or more locations and the balance of annual consolidated income less specific tax deductions (that is, statutory social security and housing fund contributions by the individual) exceeds CNY 60,000
• an individual receives labour services income, royalties or copyright income and the balance of the annual consolidated income less specific tax deductions exceeds CNY 60,000
• the prepaid tax amount is less than the actual tax liability in a tax year
• the individual needs to apply for a tax refund

Late payment of tax is subject to a daily interest charge of 0.05%. A penalty of up to five times the amount of unpaid tax may be levied for tax evasion or refusal to pay tax.

An individual subject to China IIT on worldwide income may claim a foreign tax credit if they have paid tax in a foreign jurisdiction or region. The credit is limited to the China tax payable computed on the same income based on China tax law.

China has entered into double tax treaties with 110 countries. Please note, this number includes seven double tax treaties which have not yet entered into force at the time of writing.