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Q: What are the tax implications of having options included as part of your expatriate package in China?

When assessing the tax obligations of options, the authorities will examine the location of services rendered in earning the options and income generated. There are three main issues to consider:

1. Location of grant

2. Location of vesting

3. Location of exercise

Whilst stock options granted prior to residing in China and based on services performed outside of China are PRC-tax exempt, if you are a resident of China for less than five years and are granted options during this time, you may certainly need to consult a professional to understand your tax liabilities and your individual situation.

Related FAQs From the topic Personal Financial Management

1.What are the investment options open to expatriates in China?

As an expatriate, you have great scope in your investment decisions. Whilst analysts argue that investments should be judged using pre-tax returns, where expatriates are concerned, there should be extensive research conducted as to whether the investments should be owned and where income and capital gains should be realised. After all, you are the one taking the risk of the investment, so why would you want to give any more to the tax-man than you possibly have to?

When it comes to your personal financial planning and investment strategies, we would recommend that you first sit down and plan your financial goals, assess your risk adversity, your time horizon and your current financial position. When this has been finalised you are in a much better position to seek professional advice and begin your financial planning.
2.What kind of benefits do non-Chinese residents have access to when residing in China?

This will depend on what type of visa you are working on, your tax status in China and the length of time you spend in the PRC within a 12 month period. Tax rates in the PRC are, in many cases, lower than other countries. This provides benefits of reducing your tax obligation on income earned from labour, from investments and also possibly on any capital gains that you realise.

Also, by structuring your employment contract properly, there are many tax deductions made available to expatriates that will assist in reducing your taxable income. These can include housing allowances, education allowances, home leave allowance, and reasonable expenses. Similarly, by structuring year-end bonuses properly, taxation burdens can be reduced.
3.What should expatriates do about their banking whilst in China?

Whatever your financial circumstances, as an expatriate you would be advised to examine the possibility of opening an offshore bank account, in order to take advantage of the tax efficiency and enhanced confidentiality that this provides. No tax is payable on interest arising from money held in an offshore bank account, so even if you are just looking for somewhere to receive funds remitted from home, or have your salary paid into, this has to be a plus.

In China this is particularly important given the restrictions on taking hard Chinese currency out of the country. The controls are quite strict and troublesome and this can cause issues if you have all your salary and savings accumulating in a bank account within the PRC.

It is most convenient usually to set up a bank account within China for conducting day-to-day transactions easily and limiting currency exchanges and risks. You can also then set-up an offshore account (which can usually be denominated in many currencies) where you accumulate savings and conduct investment activities. This also provides greatest flexibility when it comes to leaving countries!
4.What is the difference between expatriates and local Chinese for individual income tax purposes?

There is a classification in Chinese citizens and non-Chinese citizens, both of them are regarded as taxpayers in China and their IIT shall be payable in accordance with the provisions of the IIT law of the PRC.

Chinese citizens refers to an individual who has a domicile in the territory of China (refers to individuals who by reason of their family registration administration, family or economic interests habitually reside in China), or who has no domicile but has stayed in the territory of China for one year or more shall pay individual income tax in accordance with the provision of this law for their incomes obtained inside and /or outside the territory of mainland China.

An individual who has no domicile and does not stay in the territory of China or who has no domicile but has stayed in the territory of China for less than one year shall pay individual income tax in accordance with the provisions of this law for their income obtained in the territory of mainland China.

Non-Chinese Citizens refers to individuals who are neither domiciled nor resident in China, or who are not domiciled and have resided for less than one year in China. They shall pay individual income tax in accordance with this Law on income derived from sources within China. Non-Chinese Citizens assume a limited obligation to pay tax and only income from China will be subject to IIT. With regard to expatriates, “to live in China for one year” requires the expatriate to live in China for 365 days per taxable year.

If the expatriate temporarily leaves China for no more than 30 days every time or no more than an accumulated total of 90 days for several times, the time will still be regarded as one year.
5.What is the legal statement about tax payment of individuals, who have stayed more than 1 year and less than 5 years (including the 5 year) but have no domicile within China?

For income derived from sources outside Mainland China by individuals not domiciled in China, but resident for more than one year and less than 5 years, subject to the approval of the responsible taxation authorities, IIT may be paid for only that part which was paid by companies, enterprise or other economic organisations or individuals which are in China.
6.Which opinion exists within the jurisdiction for individuals living in the territory of China longer than 5 years?

For individuals who have lived within the territory of China for 5 full years, from the sixth year onwards, individuals who have lived within the territory of China for one full year shall declare payment of tax on their incomes gained from inside and outside China every year. For those individuals who have lived in China less than one year, they shall declare payment of tax only on their incomes of that year gained from within the territory of China.
From the sixth year onward if an individual resides less than 90 days within the territory of China, their tax obligations shall be determined according to the Individual Income Tax Law of China and the 5 year time limit will start recomputing from the year when they have lived within China for one full year again.
7.Which type of income will be subjected to payment of individual income tax (IIT)?

The taxpayer has to pay attention as there are a lot of types of income:

• Income from wages and salaries;

• Income from private industrial and commercial households from their production and business operations;

• Income from contracting or leasing enterprises and institutions;

• Income from remuneration for labor service;

• Income from authors’ remuneration;

• Income from royalties;

• Income from interest, stock dividends and bonuses;

• Income from lease of property;

• Income from transfer of property;

• Occasional income; and

• Other incomes specified as taxable by the department of the State Council for finance.

Whether the place of payment is inside the China or not, it shall be regarded as income derived from sources inside China if it is;

• Income from personal services provided inside China because of the tenure of an office, employment, the performance of a contract and etc.

• Income from the lease of property to a lessee for use inside China.

• Income from the assignment of property such as buildings, land use rights, etc. inside China or assignment inside China of any other property.

• Income from the licensing for use inside China of any kind of licensing rights:

• Income from interests, dividends and extra dividend derived from companies, enterprises and other economic organisations or individuals inside China
8.Regarding the tax liability of directors and senior management personnel of enterprises within the jurisdiction of China. How is it determined and what measures will the tax authorities take if this tax is not paid?

For individuals who assume posts as directors or senior level managerial personnel of an enterprise within China, director fees or wages and salaries gained by them, which are paid by the enterprise within China, shall be individually taxed on income from the day they assume the post as director or senior level managerial personnel of the enterprise within China, until the day when they terminate the posts mentioned above.

Whether or not they perform their duties outside China, they shall perform the tax paying obligations on wages and salaries gained by them, which are paid by the enterprise outside China.

If they fail to do this the tax authorities will reserve the right to check and ratify their income referring to similar entities and positions in local area.
9.What has to happen for IIT to be reduced upon approval?

There are three situations, whereby IIT can be reduced:

• Income derived by disabled persons, unsupported aged persons or members of a martyr’s family;

• The taxpayer suffers major losses caused by disasters;

• Other cases in which reduction is approved by the finance department of the State Council