China has become a growing powerhouse since it embraced free-market principles more than 30 years ago. This explosive economic boom has attracted many expats that mostly reside in Beijing, Shanghai and Guangzhou. Expat tax filing is getting more complex so American expats China should learn more about overseas tax issues like Physical Presence Test and Bona Fide Residence Test. Proper expatriate tax preparation and planning is required because China has one of the most complex tax systems for expats. Moreover, future expats would like to know the income tax rates in China as well as whether they can minimize US expat taxes.
Expatriate Tax Filing Requirements for Expats China
Many American expats China are not informed about the fact that US citizens are taxed on a worldwide income. It means that American expats China have to file US expatriate tax returns, to pay overseas taxes and to comply with tax filing requirements in China.
However, American expats China can utilize several exlusions to avoid double taxation. There are three provisions under IRC section 911.
- Foreign earned income exclusion. American expats China may be able to exclude up to $101,300 for 2016 if they meet one of tests like Physical Presence Test or Bona Fide Residence Test.
- Foreign housing exclusion. American expats China can deduct several foreign housing expenses too.
- Foreign tax credit. If American expat paid overseas taxes in China, they can minimize US taxes on an expatriate tax return dollar for dollar.
American expats China may be required to report their financial accounts and file the FBAR.
Tax system in China – FAQ
I am an American expat residing in China. Is my worldwide income taxed in China?
Individual taxation is determined by two factors: domicile status and period of residency. A domicile of China is taxed on a worldwide income. However, a non-domicile is taxed only on income derived from China according to the period of residency.
What is the difference between domicile and non-domicile in China?
A non-domicile status applies to most expatriates who haven’t resided in China for more than five years. Moreover, per several tax treaties a non-domicile may be exempt from paying a tax in China if the income was earned during up to 183 days during a taxable year or 12-month period.
What is the tax year in China?
The tax year in China ends on December 31. Annual tax return is due by March 31 of the following year. Additionally, employers must submit monthly tax returns by the 15th of the following month.
What is an income tax rate in China?
China uses a progressive income tax rate from 3% to 45%. Investment income and capital gains are subject to a flat 20% tax rate. Effective October 15, 2011 expatriates working in China and their employers are required to make social security contributions. This list includes medical insurance, pension, work-related injury insurance, maternity and unemployment insurance.
Which income is considered a taxable income in China?
Generally, all types of earned income (including wages/salary, bonuses, foreign service allowances, equity based compensation etc) are taxed in China. However, several benefits-in-kind (relocation, language training, meals and laundry etc) provided to expatriates are not subject to tax if they are supported by proper documentation. Careful tax planning is required to minimize overseas taxes paid in China.
Can American expats China file a tax return on overseas taxes with a spouse?
Spouses file separate returns and receive individual monthly deduction. Expatriates are allowed a higher personal exemption in the amount of RMB4,800. There is no credit or exemption for a spouse or dependents.
Is it a requirement to file a tax return in China every year?
Both domicile and non-domiciles are required to file an annual tax return if they have resided in China for the full year and their annual income exceeds RMB 120,000. A tax return must be filed even if there is no additional tax liability.
Does China have a double-taxation treaty and social security agreement with the USA?
China has a tax treaty with the USA to provide a double taxation relief. However, there is no totalization (social security) agreement between the USA and China as of today.
These are some of the basic overseas tax issues that American expats China should consider.
American expats who require further assistance with overseas taxes paid in China and US expatriate tax returns, should seek help of an expat tax CPA that provides international tax services. International tax experts at Artio Partners will be pleased to resolve your tax questions.