When a sourcing project gets to a certain size, it often makes sense to set up a permanent presence on-the-ground in China to help manage the supply chain. This series of blog posts covers some of the key areas of consideration when it comes to setting up in China.
Individual Income Tax
China has a progressive individual income tax (“IIT”) ranging from 5% to 45%. For foreign individuals working in China (including residents of Hong Kong, Taiwan and Macau), monthly taxable income is calculated after a standard monthly deduction of RMB4800. An FIE must generally serve as a withholding agent for its employees, and withhold and pay income tax on their behalf each month.
China relies principally on withholding to collect individual income tax, and only high income individuals are generally required to file separate annual tax returns. For IIT purposes, taxable income refers to “wages, salaries, bonuses, year-end bonus, profit share, allowances or subsidies or other income related to job or employment”. Certain employment benefits for foreign individuals could be specifically treated as not being taxable under the IIT law if certain criteria can be met.
①employee housing costs (with supporting invoices) borne by an employer;
②reasonable home leave fares of 2 trips per annum for the employee (with supporting invoices);and
③reasonable reimbursement of certain meals, laundry, language training costs and children’s education expenses in the PRC (with supporting invoices).
Any cash allowance paid to cover expected work-related expenditures (such as an entertaining or travel allowance) will be fully taxable to an employee. IIT may be reduced by reimbursing specific work-related expenses incurred by an employee (which may include entertainment, health or social club fees, local travel, newspapers and journals, telephone costs, etc.) instead of paying an allowance.
The expense reimbursement may not be subject to IIT if prescribed administrative procedures are followed.
Furthermore, special tax treatment is also available for an annual bonus. As such, careful tax planning can help alleviate the tax burden on foreign individuals.
Note that FIEs are also subject to restrictions on the amount of foreign exchange that they can retain in their current account and capital account.
Written for CSIC by Sophie Mao
China based lawyer at www.AsiaBridgeLaw.com