Tax incentives for attracting overseas talents - new individual income tax rules on individuals without domicile in China

On 14 March 2019, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly released three individual income tax (IIT) related public notices, which are Announcement on the Criteria for Determining the Residence Time of Individuals without Domicile in China (Announcement 34), Announcement on Individual Income Tax Policies for Non-resident Individuals and Non-domiciled Resident Individuals (Announcement 35) and Notice on Individual Income Tax Preferential Policies for the Guangdong-Hong Kong-Macau Greater Bay Area (Circular 31). The three public notices became effective from 1 January 2019. A lot of details in respect of the calculation and payment of IIT of a non-PRC individual (including residents of Hong Kong, Macau and Taiwan) have been elaborated and clarified in Announcement 34 and Announcement 35. The rules under these three public notices generally reduce the IIT impact on non-PRC individuals in China.

I.    Announcement 34

(1)    6-year rule

Pursuant to Announcement 34, an individual without a domicile in China will be required to pay IIT on his/her global income in a calendar year if:

(a)    he/she has resided in China for 183 days or more accumulatively in each calendar year of the previous 6 consecutive years; 

(b)    he/she has not left China for more than 30 days in a single trip in any one of the previous 6 consecutive calendar years; and 

(c)    he/she continues residing in China for 183 days or more accumulatively in the current calendar year (i.e. the 7thcalendar year).

Where an individual without a domicile in China has stayed in China for less than 183 days or has left China for more than 30 days in a single trip in any one calendar year, the “6 consecutive calendar years” shall start over again.

Further, the “6 consecutive calendar years” only started from 1 January 2019, which means individuals without a domicile in China will not be required to pay IIT on his/her global income before 2025. Having said that, such individuals still need to pay IIT on their income sourced from China and/or paid by a PRC party.

(2)    24-hour rule

For the purpose of calculating the 183 days, an individual without a domicile in China shall be deemed to reside in China for 1 day only if he/she has stayed in China for the whole 24 hours in that day.

II.   Announcement 35

Announcement 35 touches on various technical matters in the calculation and payment of IIT of an individual without a domicile in China, including a few formula for tax calculations. Below are brief highlights of Announcement 35:

(1)    IIT payable on the salary income of an individual without a domicile in China 

The positions are summarised as follows:

Scenarios

Individual without a domicile in China

Period of time residing in China 

Income sourced from China (payment for work conducted inside China)

Income sourced from outside China (payment for work conducted outside China)

 

 

 

Paid by PRC employer

Paid by overseas employer

Paid by PRC employer

Paid by overseas employer

1

Non-PRC tax resident

≤  90 days within one calendar year

Taxable 

Exempted

(unless ultimately borne by a PRC employer) 

Exempted

(except for directors, supervisors or senior managers of PRC employer)

Exempted

2

˃ 90 days and ˂ 183 days within one calendar year 

Taxable 

Taxable 

Exempted

(except for directors, supervisors or senior managers of PRC employer)

Exempted

3

PRC tax resident

≥ 183 days in each calendar years for no more than 6 consecutive calendar years 

Taxable

Taxable

Taxable

Exempted

4

≥ 183 days in each calendar years without leaving China for more than 30 days in a single trip for more than 6 consecutive calendar years

Taxable

Taxable

Taxable

Taxable

Notes:

(a)  A director, supervisor or senior manager of a PRC entity shall pay IIT on his/her salary income paid/borne by the PRC entity, regardless of whether he/she performs his/her duties inside or outside China.

(b)  The above are the positions under the PRC tax laws and regulations. The IIT payer may choose to enjoy the relevant treatment under the tax treaty/arrangement between PRC and his/her home country/region where such treatment is different from the above.

 (2)    Proportion of taxable salary income of an individual without a domicile in China 

Under Scenarios 1 - 3 in the table above, the salary income subject to IIT (including bonuses and income sourced from an equity incentive plan) will be determined in proportion to the days he/she works inside and outside China respectively.

(3)    PRC employer’s obligation of reporting payment of salaries to an individual without a domicile in China by its overseas affiliated parties

If an individual without a domicile in China receives salary income for his/her employment in China fully or partly paid by the overseas affiliated parties of his/her PRC employer, which should have been paid by his/her PRC employer, such individual may (1) declare and pay the IIT on his salary income to the competent tax authority on his/her own, or (2) entrust his/her PRC employer to withhold and pay IIT for and on his/her behalf.  

Where the individual handles the tax declaration and pays the tax on his/her own, his/her PRC employer is still required to report the relevant information to the competent tax authorities within 15 days in the next month after the relevant income is paid, including such individual’s work arrangements between the PRC employer and its overseas affiliated party, the overseas payment information as well as the contact details of the individual etc. 

(4)    Miscellaneous

Specific formulae for calculating IIT payable for regular salary income, bonus and equity incentive plan under different scenarios are set out in Announcement 35. There are details of the implementation of the relevant treatments under a tax treaty/arrangement between PRC and the home country/region of an individual without a domicile in China. It also provides the rules regarding the declaration and payment of IIT payable by an individual who changes from a non-PRC tax resident to a PRC tax resident, or vice versa. 

III. Circular 31

According to Circular 31, local governments of Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing will provide IIT-free subsidies to overseas high-end talents and critically lacking talents (including residents of Hong Kong, Macau and Taiwan) working in the Great Bay Area (GBA) based on the difference in IIT burden between the Mainland and Hong Kong. The definition and scope of the “overseas high-end talents” and “critically lacking talents” and details of the subsidies will be determined by the local governments.  Circular 31 will remain effective for 5 years until 31 December 2023.

Our Comments

Announcements 34 and 35 provide clearer guidance for an individual without a domicile in China on how to calculate and pay IIT. The tax treatment under the three public notices are mostly in favour of the non-PRC individuals, particularly for the Hong Kong/Macau residents who commute between Hong Kong/Macau and the Mainland daily for work. It is expected that more non-PRC talents will be attracted to work in Mainland China.

On the other hand, a non-PRC individual and/or his/her employer (either PRC employer or overseas employer or both) may take into account the following in order to avoid the potential risks under the new IIT rules: 

(a)    A non-PRC individual shall keep a good record of his/her arrival in and departure from Mainland China for calculating his/her residence days and working days accurately.

(b)    Where an overseas employer sends its non-PRC employee to work in Mainland China, it shall not only consider the IIT payable by the employee, but also the permanent establishment issue of the overseas employer which could potentially be triggered by such arrangement.

(c)    For tax purposes, PRC employers should establish an effective system to manage their non-PRC employees, including monitoring their residence days and working days in Mainland China, reporting relevant information to the competent tax authority, making appropriate arrangement with overseas affiliated parties to reduce the tax burdens of the relevant parties to the extent allowed by law, etc.

(d)    A few matters have yet to be clarified further, such as IIT on the economic compensation payable to a non-PRC employee when his/her labour contract with a PRC employer terminates, the detailed rules of filing the non-taxable income of a non-PRC individual with the tax authority for record, and the implementation details of the preferential tax treatment in the GBA. The MOF, SAT and the local governments may release more IIT rules in the coming few months. Those concerned should keep a close eye on the development.

Please note that the above information are provided for general information purposes only and should not be considered as legal advice. The application, impact, interpretation and implementation of Announcements 34 and 35 and Circular 31 and the rules made thereunder are subject to determination by SAT and the local branches of SAT. As such, we make no representations as to the completeness, accuracy or any other aspect of the information provided. In the event of doubt, it is advisable to seek advice from tax advisors or liaise with the competent tax authorities.