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Q: Who is responsible for the taxation liability of an expatriate employee working in China?

Under Chinese law, an employer-paid bill is treated as a taxable benefit. A foreign establishment in China is the withholding agent of its employees' tax, and is obliged to report to the Chinese authorities that it is bearing an employee's tax liability.

Related FAQs From the topic Expatriate Employee

1.How serious are the Chinese tax authorities in cracking down on tax evasion by expatriate employees?2249

Chinese tax authorities’ are mounting a campaign against tax evasion. This means it is more likely that expatriate employees in China will be faced with an unpaid tax bill as well as an additional late payment fine of 0.05 percent per day of the overdue amount.

If the tax authority finds out about the late payment, it will provide a time limit to the individual or FIE on the individual’s behalf, to declare his / her tax situation and settle the outstanding tax. If they miss the deadline, a fine in the region of RMB 2,000 to RMB 10,000 may also be imposed.

If the expatriate employee approaches the tax authorities first before they find out about his problem, they may be able to avoid, or at least minimise, the fine as China’s officials have a tradition of extending leniency to individuals who admit their wrongdoings and turn themselves in. It is important that an expatriate employee avoids giving the impression that he or she is engaged in a conscious effort to evade paying taxes under the Supplementary Individual Income Tax Rules of the Standing Committee of the National People’s Congress on Punishment for Tax Evasion and Refusal to Pay Tax. Tax evasion is punishable by prison sentences of up to seven years and fines of up to five times the amount of tax evaded.
2.Is it likely that an expatriate employee could get detained in China for outstanding tax payments?2248

Under the Law of the People’s Republic of China on the Administration of Tax Levying (Article 44), a taxpayer must settle outstanding tax payments or provide a guarantee for the outstanding payment to the tax authority before leaving China. If the taxpayer fails to do so, the tax authority may inform the border control authorities and stop the taxpayer from leaving. It is not known whether the Customs authorities have already used this method against managers or other personnel of foreign-invested enterprises, but there have been reports of foreign artists who had performed in China being held up at the border until they settled their tax bills.
3.How is the taxation liability for an expatriate employee calculated?2246

Depending on whether the foreign establishment is bearing all or only a part of the expatriate employee’s personal tax bill, different calculation formulae apply. Notices 89 and 199 issued by the State Administration of Taxation in 1994 and 1996 respectively set out the various formulae for “gross up” income and calculating the extra amount of tax due.

The basic formula provided in Notice 89 applies to individual income tax which is fully borne by an employer. It takes into account the monthly income; the allowable monthly deduction (which under current rules usually amounts to RMB 4,800 for foreign employees) and a quick calculation deduction which is specified together with the applicable tax rate on a progressive scale in a table attached to Notice 89.
4.Are there variations to the previous Taxation Liability Formula?2245

The formula mentioned above can be varied if the expatriate employee is one who benefits from a tax equalisation plan. Under such equalisation plans, the employer bears, on behalf of the employees assigned to work in China, the tax which exceeds that of their original country of residence. The expatriate employee’s wages following deduction of tax from their original country of residence will be the “monthly income” in this case.
5.Is there an alternative to the employer paying tax on the expatriate employee’s grossed up income?2244

Yes. This is in the form of a loan bonus. An employer makes a loan to cover the employee’s individual tax bill and this loan is later restructured, waived or paid when the employee has completed his China posting. If the loan is to be repaid after an employee leaves PRC, other tax planning considerations come into play. It is important to consider whether the loan will be taxed in the employee’s home country as well as whether it will be taxed in the PRC where the employee receives the loan.

In addition, there is a distinction between loans made by foreign-invested companies in China and those made by foreign shareholders outside the PRC. A foreign-invested enterprise should book such a loan as the waiver of such a loan may be considered additional China-sourced income on which the employee is liable for income tax in China.
6.How can an expatriate employee working in China and Hong Kong avoid double taxation?2243

Agreement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Incomes (“the Arrangement”) has been effective since April 1,2007 Hong Kong and January 1, 2007 in Mainland China. It is aimed at preventing the imposition of income tax and other similar taxes in both Hong Kong and in the Mainland. Specifically, it covers PRC individual income tax, enterprise income tax, and the parallel Hong Kong taxes: salaries tax, profits tax and tax charged under personal assessment. Thus, the Arrangement could affect the expatriate employee from the start of their employment in the Mainland, and may also have some bearing on the employer.
7.Would an expatriate employee be considered a resident of Hong Kong for taxation purposes under the Arrangement?2242

Under Article 4 of the Arrangement, a “resident” of Hong Kong who works in the Mainland will be taxed on their remuneration for Mainland-based work by the PRC tax authorities. The Arrangement is sketchy on the meaning of “resident”. The definition given is “any person who is liable to the taxes of one side by reason of their residence, domicile, place of effective management, location of head office or any other criterion of a similar nature in accordance with the laws of the respective sides”.
8.How many days will the Hong Kong employee have to be in China before they will incur tax liability under the Arrangement?2241

The crucial question is: “Will the employee clock up more than 183 days in China during any one calendar year?”

Before the implementation of the Arrangement, individuals from Hong Kong were limited to a 90-day tax-exemption period in the Mainland. Under the Arrangement, the Hong Kong employee’s tax liability in China will not be triggered until after 183 days within any 12 months. The 183-day exemption applies to those Hong Kong “residents” whose salary is borne by an employer outside China. After 183 days, the Hong Kong employee will be taxed in the Mainland on a “days in, days out” basis.
9.Will the fringe benefits received by an expatriate working in China be taken into account for their PRC individual income tax bill?2240

The Individual Income Tax Law of the People’s Republic of China and its accompanying Implementing Regulations (2011 revision), only scrape the surface of the issue of fringe benefits. On the one hand, “subsidies and allowances” related to the tenure of an office or employment that is derived by individuals by virtue of them having secured the tenure of that office of employment” are bundled in with taxable “income from wages and salaries”. On the other hand, certain allowances and subsidies are “exempted from individual income tax by State Council regulations”. These exemptions are outlined in subsequent notices issued by the State Administration of Taxation and the Ministry of Finance.

The PRC tax authorities allow very few expatriate benefits. The hardship allowance cannot, however, escape the taxman’s clutches as it is deemed to fit the description “related to the tenure of an office or employment”. A job in China today is still considered a “hardship” post. Any salary boost to compensate for such hardship will be caught in the tax net.
10.How would tax be levied on fringe benefits?2239

Sometimes, the taxability of a fringe benefit will depend on the way it is structured. For example, if the company is providing the expatriate employee’s housing free of charge for the length of their employment in China, the tax authorities will let this benefit slip through.

Likewise, if the company paid the actual expenses of the employee’s housing, no tax would be levied. It would be a different story, however, if the expatriate employee was given a fixed housing allowance every month and selected accommodation that cost less than the allowance. The amount of such allowance spent on items other than housing would be taxable. Tax would also be an issue if the company passed the title to the residential premises to the employee after, say 5 years of service in China. In this case, the value of this payment-in-kind would be spread over their monthly salary during the 10 year period and taxed accordingly.

As long as the expenses are “reasonable”, the expatriate employee can rest easy on holiday and their children can enjoy school without being pressured by an extra tax burden. A 1997 SAT notice specifically referred to a tax exemption on trips to visit relatives. Thus it may be tricky trying to squeeze a beach holiday in Bali past the PRC tax officials.