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Q: Do foreign employees have to pay China taxation and on what basis is this calculated when their salaries are paid offshore?

When a foreign employee is not a China domiciled individual and receives remuneration from a foreign employer whereby the payment is not borne by the company in China, the income tax payable will depend on the length of residence in China in a year as follows (varies by country):

• Not more than 90/183 days: exempt from paying income tax.

• More than 90/183 days but less than 5 years: Income tax is payable on China sourced income during the period during the period of residence in China.

• Over 5 years: Income tax is payable on worldwide income from the 6th year.

The above is a general rule, though there are in place bilateral tax treaties with some countries, providing an extra source of rules for interpreting the term "residence".

When the employee is paid predominantly off-shore, the employee will need to declare the element that is associated with the work conducted in China on behalf of the company's entity there.

Related FAQs From the topic Others Tax-related Issues

1.Can losses be carried forward in China?2360

Chinese regulations allow losses to be carried forward for up to five years. Losses are not however allowed to be carried back.
2.What should a company do if it has not filed its taxes properly, how can this be rectified?2359

China is making great strides in reforming its taxation system, improving the collection of tax and ensuring compliance. The taxation authorities tend to look favorably on companies coming forward to resolve their irregularities, with severe consequences if the tax department finds them out first.

When a company has not filed taxes properly it is advisable to discuss with a taxation agent immediately to first assess the potential liability and the extent of irregularities. Additionally such agents are licensed to discuss and negotiate with the authorities on the company’s behalf.

LehmanBrown works with a number of experienced agents and can assist in both resolving taxation problems and in ensuring compliance going forward.
3.Which condition is important in order to pay corporate income tax in China?2358

Any foreign enterprise with establishment in China that generates income (including production and business operation income and other income) from within China should be subject to corporate income tax in China.
4.Why is the definition of business agent very important for foreign companies?2356

Generally, a business agent refers to a company, enterprise or other economic organisation or individual entrusted by a foreign enterprise to act as an agent in any of the following:

• representing the foreign principal on a regular basis in arranging purchases and signing of purchase contracts on behalf of the principal;

• entering into agency agreements or contracts with the principal, storing on a regular basis products or commodities owned by the principal, and delivering on behalf of the principal such products or commodities to other parties;

• being authorised to represent the foreign principal on a regular basis in signing of sales contracts or in accepting purchase orders
5.What is the difference between permanent establishments and non-establishments of a company. How is this characterised and what are the consequences for taxation?2355

Usually, permanent establishment includes:

• place of management;
• a branch;
• an office;
• a factory;
• a workshop;
• a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources;
• a building site, a construction, assembly or installation project, or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than six months;
• an installation, drilling rig or ship used for the exploration or exploitation of natural resources, but only if so used for a period of more than three months; and
• the rendering of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where such activities continue (for the same or a connected project) within the country for a period or periods aggregating more than six months within any twelve month period.

There are also some activities by a foreign enterprise in China will not be considered as constituting permanent establishment, including:

• the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
• the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;
• the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
• the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;
• the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activities of a preparatory or auxiliary character;
• the maintenance of a fixed place of business solely for any combination of the activities above, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.
6.What is the usual way the income of a permanent establishment is taxed ?2354

Generally, a permanent establishment of a foreign enterprise should be taxed on its income sourced from within China. Theoretically, the foreign sourced income attributable to the permanent establishment of a foreign entity may not be taxed in China.

The taxable income of a permanent establishment within a tax year should be determined by the total income of the current year with deductions of the relevant costs, expenses and losses. In practice, a deemed profit rate ranges from 15%-50% may apply when the costs and expenses cannot be accurate booked.
7.Which reasonable deductions are applicable in China?2353

As a general proposition, reasonable costs and executive and administrative expenses will be allowed as deductions in determining the tax liabilities of a permanent establishment of a foreign enterprise. However, certain payments to related parties or head offices will not be deductible under most of the tax treaties. The non-deductible expenses usually include royalties and interests or payment of the same nature.
8.How much is the tax rate of permanent establishments of foreign enterprises, and if there is a connection to industry, which jurisdiction will exist in this case?2352

Permanent establishments of foreign enterprises will be taxed at the rate of 25%.

In practice, the tax incentives are hard to obtain because these tax benefits need prior approvals from relevant government authorities, including SAT.
9.What should a company do if it has not filed its taxes properly, how can this be rectified?2351

China is making great strides in reforming its taxation system, improving the collection of tax and ensuring compliance. The taxation authorities tend to look favorably on companies coming forward to resolve their irregularities, with severe consequences if the tax department finds them out first.

Where a company has not filed taxes properly it is advisable to discuss with a taxation agent immediately to first assess the potential liability and the extent of irregularities. Additionally such agents are licensed to discuss and negotiate with the authorities on the company’s behalf.

LehmanBrown works with a number of experienced agents and can assist in resolving any taxation problems and in ensuring compliance going forward.
10.What happens if an FIE fails to submit to the tax authority tax filings with the stipulated time limit?2350

The tax authority shall make an assessment on the taxable income of the FIE and decide the amount to collect, according to the Provisional Measures for Assessment and Collection of Enterprise Income Tax (the “Assessment and Collection Measures”).
11.How does the tax authority determine the taxable income?2349

Two alternatives are available, one of which is the fixed amount method, whereby the tax authority directly assesses the amount of enterprise income tax that is payable, the other is to assess the taxable income rate, whereby the taxable income rate is calculated in advance.
12.Under what circumstance shall the “assessment and collection” method be taken?2348

• When the account books are not kept properly;

• When the actual expenses and costs cannot be accurately verified although the total income can be verified;

• Where the total income cannot be accurately verified although the costs and expenses can be verified;

• Where neither of the total income nor the costs and expenses can be accurately verified plus that the truthful, accurate payment materials cannot be provided;

• If, when tax payment is due, the taxpayer fails to make its tax filing within the time limit set out in the relevant tax laws and regulations, and still fails to file after being issued with an order by the relevant tax authorities to submit its tax filings within a certain time limit.
13.Should there be any change if the tax payable or taxable income rate has been fixed?2347

For the year usually there is no adjustment unless the following situation arises:

• A major company restructuring occurs;
• Major changes are made with respect to the scope of production and business or the main business that is carried on; and/or
• An event of force majeure occurs.
14.What are the consequences if an FIE fails to comply with tax laws noted above?2211

The tax payer’s acts in violation of the tax law shall be dealt in accordance with the relevant provisions of the law of The Peoples’ Republic of China on the administration of tax levying and its implementing rules (Decree of the President [2001] No.49) which stipulate there will be fine for it and compulsory execution on the tax.