How China’s new personal income tax laws affect expat professionals

If you’re heading to China in the near future, you’ll need to know how the recently-introduced personal tax residency changes will affect your financial bottom line.

The new individual income tax rules in China are now affecting the way in which expat tax residency is determined. The recently-introduced law impacts expat residents in three ways, with the most important being the shorter tax exemption time from arrival to liability for tax. It’s less beneficial for foreigners who’ve lived in the country for less than a year but more than 183 days, and includes tax on income sourced outside China and paid by Chinese individuals or businesses.

For long-stayers, the five year requirement to leave China in order to reset their global income tax clock is now extended to six years, making it less than convenient for expats who travel internationally on a frequent basis.The standard deduction applies to both residents and non-residents, and has been slightly increased by around four per cent, but it’s not very significant for expats working in the country. What might be good news for many may be the ‘special additional deductions’ applied to expenses such as children’s education costs, healthcare costs for serious conditions, mortgage interest and housing rental charges. Required by local tax offices is all relevant information in written form, which should be kept as evidence for five years. Expats need a tax ID to qualify for the special deductions.

Another pleasant surprise is that expats’ tax-exempt allowances are now applicable for a further three years, but those to whom the statute refers will need to choose between these and the special additional deductions as they can’t have both! According to the experts, those with high incomes should stick to the tax-exempt allowances, but will need to provide invoices for all relevant monthly expenses. For example, for those claiming a rental allowance, landlords will be asked to file the lease contract and issue monthly invoices, requests which may not sit well with all landlords, dependent on their business practices. For extremely well-paid expat professionals, it’s advisable to ask employers to study the new system and find adjustments able to lower the tax burden.