China changes tax regime to include foreign entrepreneurs

From the beginning of next year, China’s tax regime will include Individual Income Tax liabilities for foreign residents.

Key changes in the manner in which tax residency in China is determined are expected to substantially affect the majority of expat professionals working in the vast country' major cities. The reform of Individual Income Tax (IIT) will impose a tougher test with a lower threshold period after which foreign workers will be considered tax resident. The changes align with international standards as regards the number of days in residence in the country, with those staying for 183 days or more liable to be taxed on their global income.
The move will also allow China’s domestic tax laws to better allow double tax treaties with Western countries, although full details of the new rules’ practical implementation are not yet available.

Expat questions about the change include how China’s tax authority will actually collect the new taxes from non-domiciled expatriates, how will foreigners be able to reclaim tax and will the new law have any implications regarding expats’ visa status. Expat businesses are being urged to monitor for new updates as well as preparing the best they can whilst awaiting further bylaws. Standard deduction amounts and the new tax brackets should now have been put in place, with the remainder of the revised personal income tax rules including residency due to kick in on January 1 2019. In the IIT amendments, tax residency is applied to any foreigner who is domiciled in China as well as foreigners who are not considered domiciled but who have lived in the country for a total of 183 days out of the tax year running between January 1 and December 31. The 183-day limit is half the previous time allowed of one full year.

In addition, it’s not clear at present whether the former five-year exemption applied to expats will carry on after the new rules are fully introduced. Used by many, the exemption allowed a five year tax liability-free period on their global income, presumably as an incentive to entrepreneurs and tech specialists wishing to start up a business in China. The five-year rule was known to be bypassed by the majority of long-stay expats, simply by leaving China for an aggregate of 30 consecutive days or more, or by an aggregate absence of 90 days. This convenient loophole will now no longer exist, meaning avoiding paying tax as an expat just got a whole lot harder!