At the end of 2018, China amended its individual income tax law, effective from 1 January 2019. The new tax law stipulates that Chinese tax residents are required to pay tax to China on their worldwide income.
Who is a Chinese tax resident?
According to the new Personal Income Tax Law, tax residents comprise the following two categories.
- Have a domicile in China;
- Individuals who have no domicile but have lived in China for a total of 183 days in a tax year
‘Domicile’ does not only refer to whether there is real estate in China, but also refers to habitual residence in China due to Chinese Hukou, family, and economic interests. A person who is domiciled in China and who has lived abroad for study, work, family visits, travel, etc, and who will eventually return to China to live there, has his habitual residence in China, has domicile in China.
In simple terms: a person has domicile in China / or resides in China for 183 days a year, regardless of nationality, are a Chinese tax resident.
What income is considered as foreign income?
Announcement No.3 issued by the Ministry of Finance and the State Administration of Taxation on 17 January 2020 stipulates that the following income is foreign income.
- Income derived from services rendered outside China as a result of employment, hiring, performance, etc.
- Income from fees paid and borne by enterprises and other organizations outside China.
- Income from the licensing of various concessions for use outside China.
- Income derived from production and business activities outside China in connection with production and business activities.
- Interest, dividends received from enterprises, other organisations and non-resident individuals outside China.
- Rental income derived outside China.
- Income from the sales of real estate outside China, the transfer of shares, equity shares and other equity assets resulting from investments in enterprises and other organizations outside China, or the transfer of other property outside China.
- Incidental income paid and borne by enterprises, other organisations and non-resident individuals outside China.
- In addition, if the Ministry of Finance and the State Administration of Taxation provide otherwise, follow relevant regulations.
When did the regulations come into effect?
It is mentioned in Announcement No.3, starting from the year 2019, resident individuals should declare their foreign income within the period from 1 March to 30 June of the following year.
If a Chinese tax resident fails to declare and pay tax on his or her income earned outside of China on the due date, late payment penalties will be imposed as required and will affect the individual’s income tax credit which will form part of that individual’s social credit.
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