Expats in China now feeling effects of tax changes

Expatriate entrepreneurs considering heading for China are reminded to consider the effects of the government’s recent tax changes.

A huge number of expatriates have arrived in China to take advantage of the country’s tax laws giving a five-year tax exemption on their worldwide earnings. New laws introduced late last year now state that expatriates must be liable as tax residents after they’ve been in China for just 183 days. In addition, tax is now being calculated annually rather than monthly.

In its favour, the new law states the minimum personal income tax threshold is raised from $513 (3,500 yuan) to 5,000 yuan monthly or 60,000 yuan yearly. In addition, deductions for special circumstance expenses such as children’s education, caring for the elderly, continuing education, rent and housing loan interest and treatment for serious illnesses have all been added to the deductions list. Expat bonuses are being hit, with the new law now in force as of January 1. High income-earning expats, the sector which was expected to be worst hit, are now calculating how much they’ll lose on their annual bonuses, and those with more than a single source of income are facing increased bills from the Chinese taxman.

For those receiving royalties as well as remunerations, it’s worse news as these are now combined with salaries up to a maximum of 45 per cent under China’s progressive tax bracket system. For many high earners, the combination totals catapult them into a far higher bracket for taxable income. China operates one of the world’s highest tax rates for upper-income earners at 45 per cent, thus dissuading much skilled international talent from deciding on the country as a base. In comparison, Singapore and Hong Kong have far less oppressive tax rates at 22 and 17 per cent respectively, making them far more attractive as destinations for ultra-high earners.