FAQs About 2020 Annual Individual Income Tax Settlement for Non-resident Foreign Individuals
What is the non-resident?
According to the Article 1 of Individual Income Tax Law of the People's Republic of China, non-resident refers to any individual who has no domicile in China and does not stay within the territory of China or who has no domicile in China but has stayed within the territory of China for totally less than 183 days in a single tax year.
What's the difference of tax liability between the resident and the non-resident？
The residents defined in the Individual Income Tax Law of the People's Republic of China need to pay individual income tax on the incomes derived from inside and outside China mainland which means they need to pay individual income tax on their global incomes.
Non-residents should pay their individual income tax on the incomes derived from China mainland. That is they only need to pay individual income tax in China on domestic income and they do not need to pay individual income tax in China on overseas income.
What are criteria for determining the source place of income?
Non-residents only pay taxes on domestic-derived income, therefore, determining the source place of income is the premise of determining the tax liability of non-residents.
Four categories of criteria are summarized which are basically mentioned in Article 3 of the Individual Income Tax Law Implementation Regulation of the People's Republic of China and Article 1 of Ministry of Finance and State Taxation Administration Announcement on the Individual Income Tax Policies of Non-residents and Non-China-mainland-domiciled Residents (Announcement No. 35 of the Ministry of Finance and the State Taxation Administration in 2019).
The first category is determined by the arising place of service. This category is mainly applicable to the income from the services in China mainland due to holding a position employment and performance. For this kind of income, the source place of income is generally determined by its arising place of service.
The second category is determined by the place of use. This category is mainly applicable to the income from leasing the property to the lessee for domestic use and the income from licensing the domestic use of various chartered rights. For this kind of income, the source place of income is the place of use.
The third category is determined by the location of immovable property or the place of transferring behaviors. The income from the transfer of immovable property and other properties located in China mainland or from the transfer which is domestically conducted of other properties, whether the place of payment is in China or not, belongs to the income derived from China.
The fourth category is determined by the payment place. Income from interests, dividends and bonuses obtained from enterprises, institutions, other organizations and residents in China is the domestic-sourced income. Authors' remuneration paid or borne by domestic enterprises, institutions and other organizations is derived from China.
Except for these criteria, the directors' fees, supervisors' fees, salaries and wages or other similar remuneration paid or borne by the domestic resident enterprise, obtained by an individual who holds the post of director, supervisor and senior management (the "senior-occupation holder") of a domestic resident enterprise, whether or not performing the individual’s duties in China mainland, belong to the domestic-sourced income.
What is tax exemption for non-residents?
According to Individual Income Tax Law Implementation Regulation of the People's Republic of China, for non-resident who has domestically resided for no more than 90 days in a tax year, the part of the individual's domestic-sourced income paid by an overseas employer and not borne by the employer's institutions or premises in China mainland shall be exempted from individual income tax.
How do non-residents pay tax on comprehensive incomes?
A combination of comprehensive and classified tax system was established under the Individual Income Tax Law of the People's Republic of China revised in 2018. Comprehensive incomes include salaries and wages, independent personal services income, authors' remuneration and royalties. For comprehensive incomes received by a non-resident, the withholding agent shall withhold and pay the tax on a monthly or time basis for the non-resident, and such individual does not have to apply for the final settlement of the year.
How do non-residents pay tax on classified incomes?
Classified incomes include incomes from business operation, interest, dividend and bonus, incomes from lease of property, incomes from transfer of property and contingent incomes. The tax calculation methods are the same for resident and non-resident.
The income from business operation is calculated and tax is paid on an annual basis. The non-resident shall submit Tax Returns to the tax authority and pay tax within fifteen days after the end of the month or quarter, then apply for the final settlement of income tax of the year within three months after the end of the year and settle the payable and refundable tax.
For the income from interest, dividend and bonus, lease of property, transfer of property and incidental incomes received by a non-resident, the withholding agent shall withhold and pay the tax on a monthly or time basis for the non-resident.
What is a tax treaty?
Tax treaty is the agreement concluded between countries or regions with tax jurisdiction to avoid double taxation and prevent tax evasion of transnational taxpayers. It reflects coordination between different tax jurisdictions.
What tax treaty benefits can non-residents enjoy?
Non-resident obtains income from China, as long as it meets the conditions stipulated in tax treaties, it can enjoy corresponding preferential treatment to reduce the tax burden. There are three common types:
The first is to set a restrictive rate. The tax rate of dividends, interest, and royalties stipulated in the tax treaty is generally lower than that in domestic law. In this case, the country of income derived should levy tax at a rate no higher than that stipulated in tax treaty.
The second is to provide tax-free benefit. According to articles of international transportation, capital gains, government service and students, the income of qualified non-residents which meets the requirements of these articles is exempt from tax.
The third is to raise the threshold of taxation, such as the articles of business profits, independent personal services and income from employment. The income will be taxed in the state of source only if the non-resident meets certain conditions.
Who can enjoy the tax treaty benefit?
According to the resident article of the Double Taxation Avoidance Treaty signed by the Chinese government and the Double Taxation Avoidance Arrangement signed between the mainland, Hong Kong SAR and Macao SAR (hereinafter referred to as the "tax treaty"), an individual who is a tax resident of the other contracting party, can enjoy the tax treaty benefit in accordance with the tax treaty and the relevant provisions of the Ministry of Finance and the State Taxation Administration.
How dose non-resident enjoy the tax treaty benefits?
According to The Announcement No. 35 of the State Taxation Administration in 2019, if non-residents intend to enjoy the tax treaty benefits, firstly they shall fill in the “Information Reporting Form for Non-resident Taxpayers Claiming Treaty Benefits" and submit it to the withholding agent; secondly, they shall keep relevant materials for their own for reference, mainly including Certificate of Fiscal Resident issued by the tax authority in the State of residence, relevant contracts, agreements and other ownership proof.
