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According to the relevant People’s Republic of China (« PRC ») Individual Income Tax (« IIT ») laws and regulations, an expatriate who has resided in the PRC for five full consecutive tax years should be subject to the PRC IIT on a worldwide income basis from the sixth year of residence. Worldwide income includes income such as compensation income in relation to the PRC assignment, proceeds from sale of property, investment income etc..
Your first taxation year in the PRC refers to the first year of revenue declaration
during which you will not have spent more than 31 consecutive days out of the PRC or a cumulated 90 days.
A normal taxation year starts on January 1st and ends December 31st.
For example:
1/If you arrived on March 2009, your first declaration year would then correspond to the period 01/01/2010 till 31/12/2010, because during year 2009 you will already have spent more than 31 consecutive days out of the PRC.
2/If you arrived on 31/01/2010, you would remain eligible to pay your tax in the PRC during the year 2010 as you would not have spend more than 31 consecutive days outside of China. (There is always a possibility to break the rules if you spend another 60 cumulated days out of the PRC or you spend another 31 consecutive days out of the PRC).
A full taxation year in the PRC for a foreigner is defined as a year where the taxpayer is not out of Mainland China for more than 90 cumulative days or 30 consecutive days during a calendar year.
In this connection, the following tax planning can be taken into consideration for breaking the 5-year rule and avoiding worldwide taxation:
If you have resided in the PRC for four full tax years, but then leave mainland China for a consecutive 31 days or a total of 91 days in the fifth year of residence in China; you have broken the 5-year rule and the clock will restart from zero starting from the next full tax year
Or
If you have resided in the PRC for five full tax years, have employment outside mainland China and reside outside of China for more than 90 days during the sixth year; you have broken the 5-year rule and the clock will restart from zero the next full tax year.
Or
If you have resided in the PRC for five full tax years, leave mainland China for a consecutive 31 days or a total of 91 days during the sixth year and each year thereafter; in this scenario, you do NOT break the 5-year rule. But you are only subject to the PRC tax liability on your PRC sourced income derived in the sixth year and each year thereafter.
- Please kindly note that the day of entry /exit of Mainland China will be counted as only one day by the authorities.
In order to avoid our expatriates being taxed on their worldwide income in the PRC, we would like to ask you to check your presence in China for the previous years and advise us if you are close to reaching five full consecutive tax years in the PRC. If yes, please kindly let us know in advance and a single trip outside of mainland China for more than 30 consecutive days in the fifth year should be arranged upon receipt of your supervisor’s approval.
Please kindly note the company is only responsible for the tax in relation to your employment income. The company will not take any responsibility on employees’ personal income.