The amendment of individual income tax law that was made by the State Council has come into effect from the beginning of 2019 and the amended regulations for the implementation of the individual income tax law has updated the “Five-Year Tax Rule” to the six year tax rule.
Whether a foreigner is subject to “Six-Year Tax Rule” depends on their ‘Domicile’, and its definition is the most confusing part of the rule. So, what does domicile mean? How does it affect your taxable income?
Article 4: stipulates that for an individual who has no domicile in China and has resided in China for a cumulative period of 183 days for an annual period of not more than six consecutive years, the income derived from sources outside of China and paid by entities or individuals outside of China shall be exempted from individual income tax upon filing with the competent tax authorities. If he or she leaves China for more than 30 days at one time over the course of their stay in China for more than 183 days accumulatively, the successive years of the year in which he or she has resided in China for 183 days accumulatively shall be counted anew.
Article 5: if an individual who has no domicile in China has resided in China for a cumulative period of not more than 90 days within a tax year, the income derived from sources in China shall be exempted from individual income tax if the income is paid by an overseas employer and is not borne by the organization or place of the employer in China.
Foreigners who have been resident taxpayers for six consecutive years need to pay taxes on overseas income in accordance with the Chinese individual income tax law, otherwise, they can be exempted.
It means, for foreign individuals without a domicile in China, they can reset the clock of “Six-Year Tax Rule” by leaving China more than 30 days consecutive a year. Then they are not subjected to the “Six-Year Tax Rule”, the overseas income paid by the foreign companies or individual can be exempted from paying tax to the Chinese tax authorities.
There is no definition of what is ‘domiciliary law’ under Chinese law. The Chinese Civil Procedure Law seems to recognize the concept as being akin to the US concept of ‘residence’.
For Chinese citizens, because residence registration is required and a person is only entitled to one such registration, the ‘residence’ or ‘domicile’ is easy to determine. However, where there is a foreign party involved, the issue may be complicated if the foreign person has two ‘residences’ or two ‘domiciles’. There are also no Chinese cases reported where the jurisdictional issue has been raised when an estate involves both movable and immovable property and a foreign beneficiary.
Domicile is a legal criterion whereby a taxpayer is defined under China’s new Individual Income Tax law. Domicile refers to habitual residence in China on account of domiciliary registration, family ties or economic interests. For example, China is the habitual residence for an individual who should come back reside in China after staying, working, visiting families and touring in a place out of China.
Domiciliary registration- An individual with a Chinese passport or a Hukou (household registration) is generally regarded as being domiciled in China. For foreigners, permanent residence card holders are usually considered having a domicile in China.
Family ties- Generally referring to the connection with marriage and children. For example, if there is a marriage with a Chinese national, a child relationship, and living in China, it can be judged to be habitually living in China.
Economic interests- Generally considering the individual’s main property, business activity and other factors. For example, if the main property is in China, or the main business activity is in China, it can be judged as a habitual residence in China.
For foreign individuals, the economic interests here do not include the economic interests generating from employment. For example, foreign individuals working in China, although they have granted work residence permits, temporary residence permits, etc., they are included in management in China, but their residences do not belong to habitual residence in China due to household registration, family or economic interests, therefore, they don’t have a domicile in China.
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