Declaration of Individual Income Tax for Foreign Employees
- Aug 5, 2024
- Posted by: sinovestconsulting
- Category: Legal & Regulation
Declaration of IIT for Foreign Employees: Managing Annual Income Tax Settlement and Payment
Foreign employees working for companies registered in China who meet the tax resident requirements are obligated to conduct an annual personal income tax (IIT) settlement and payment. This article provides a concise overview of key considerations for foreign employees in managing their IIT annual tax filing.
Under China’s Company Law which will come into effect on 1st July 2024, the companies are required to have one or two supervisor (s) or establish a board of supervisors which means at least three supervisor (s); however there are exceptions: 1) A Limited Liability Company, with the unanimous consent of shareholders or with an audit committee exercising the powers of the supervisors, may not have supervisor(s); 2) A Joint-Stock company, with an audit committee exercising the powers of the supervisors, may not have supervisor(s).
The role of the supervisor(s) is meant to enhance accountability, mitigate risks, and protect the interests of the shareholders. Taking a limited liability company as an example, the main powers and obligations of the Supervisor(s) are summarized as follows:
Choosing the Right Tax Preferential Deduction
Which tax preferential deduction should I choose?
“Special Additional Deduction VS Eight Subsidies”
Under the Announcement on Continuing the Implementation of the Individual Income Tax Subsidy Policy for Foreign Individuals (Announcement No. 29 of 2023 by the Ministry of Finance and the State Administration of Taxation), foreign individuals who qualify as tax residents may select between two tax preferential deduction options until December 31, 2027.
Option 1: Eight Subsidiaries for Foreign Individuals
- Reasonable Housing subsidies (non-cash or actual reimbursement)
- Reasonable Meal subsidies (non-cash or actual reimbursement)
- Reasonable Laundry fees (non-cash or actual reimbursement)
- Relocation income (actual reimbursement for employment or resignation)
- Reasonable Domestic and international business travel subsidies
- Reasonable Family visit expenses (according to regulatory standards)
- Language training fees
- Children’s educational expenses
Note: “reasonable” is not specifically defined in the regulations. Based on industry experience, tax authorities generally accept that the total amount of tax-exempt subsidies should not exceed 30% to 50% of the basic annual salary (excluding bonuses and other one-time income). The exact proportion of tax-exempt subsidies may vary by individual and should be confirmed with the competent tax authority.
Option 2: Special Additional Deduction Standards, which are the unified standards as the Chinese employees
The special additional deduction for personal income tax includes 7 items, with specific applicable conditions:
- Child Education: A fixed deduction of 2,000 yuan per child per month.
- Continuing Education: A fixed deduction of 3,600 yuan in the year of obtaining relevant certificates.
- Medical Treatment for Major Illnesses: Deduction for expenses exceeding 15,000 yuan, up to 80,000 yuan, after deducting medical insurance reimbursement.
- Housing Loan Interest: A fixed deduction of 1,000 yuan per month.
- Housing Rent: Deductions ranging from 800 to 1,500 yuan per month, based on city size.
- Caring for the Elderly: A standard deduction of 3,000 yuan per month.
- Caring for Young Children Under 3 Years: A standard deduction of 2,000 yuan per month per child.
Note: Once a foreign individual chooses a deduction method, it cannot be changed within one tax year. A tax year refers to a calendar year, from January 1st to December 31st.
Determining Tax Residency Status
Are the foreign employees resident taxpayers or non-resident taxpayers?
The Individual Income Tax Law divides taxpayers into two categories: Resident taxpayers and Non-Resident taxpayers. The calculation, declaration, and payment of personal income tax for two types of taxpayers are completely different.
Resident taxpayers refer to individuals who have a residence in China or have no residence but have resided in China for a cumulative total of 183 days in a tax year (from January 1 to December 31 of the current year).
Non-Resident taxpayers refer to individuals who have no residence in China, or who have no residence but have resided in China for less than 183 in a tax year (from January 1 to December 31 of the current year), are considered as non-resident individuals.
Foreign employees in Chinese companies may be resident taxpayers or non-resident taxpayers.
The criteria are whether this foreign employee has a “residence” or stay for a length of residence prescribed by the tax laws. The “residence” here is a specific concept, which does not specifically refer to a place or place of residence, but rather a more abstract criterion for judgment. In practical operation, it is mostly based on the accumulated residence time in China to determine whether one is a resident taxpayer.
Through the following scenarios, it shows the different tax obligations of resident taxpayers and non-resident taxpayers:
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Scenario One: If a foreign employee has resided in China for less than 90 days between January 1st and December 31st of the current year. So we only need to calculate and declare the individual income tax based on the income earned from working within China and paid within China, because in this scenario he/she, as a resident taxpayer in a foreign country or region, needs to declare and pay taxes on all the income he obtains globally. In order to avoid double taxation, such regulations are made;
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Scenario Two: If a foreign employee resides in China for more than 90 days but less than 183 days between January 1 and December 31 of the current year. It needs to calculate and declare individual income tax based on the income earned from working within China and paid within China and overseas.
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Scenario Three: If a foreign employee resides in China for more than 183 days but less than six years between January 1 and December 31 of the current year. It needs to calculate and declare individual income tax based on the income earned from working within China and paid within China and overseas units, as well as the income earned from working overseas but paid within China.
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Scenario Four: If a foreign employee has resided in China for more than 183 days from January 1st to December 31st of the current year and for at least six years whether it’s domestic income, overseas income, domestic payments, or overseas payments, he/she needs to calculate and pay personal income tax on the global income.
Contact us! Sinovest’s experts are available to provide detailed policy interpretations and customized solutions for your business. We are offering comprehensive guidance on individual income tax declaration and planning.
