Preferential Taxation Policies for “Foreign Experts” and “High-level Overseas Personnel” Working (Returning to work) in China
Tax is one of the principal sources of a country’s fiscal revenue. Hence taxation is the obligation of every single citizen, which is explicitly regulated in laws of all countries. According to China’s new tax law, the general principle to be followed by foreigners in paying tax is: “Foreign individuals who have resided inside China for more than five years shall, commencing from the sixth year, pay individual income tax, in accordance with relative provisions, on the whole amount of income derived from sources inside and outside China.”
Detailed stipulations related to foreign individuals who shall pay tax in China are as follows:
(1) Foreign individuals who have resided inside China for more than five years shall, commencing from the sixth year, pay individual income tax, in accordance with relative provisions, on the whole amount of income derived from sources inside and outside China.
(2) Foreign individuals who have resided inside China for more than one year and less than five years shall, in accordance with relative provisions, pay individual income tax on the income derived from sources inside China; they shall, in accordance with relative provisions, pay individual income tax on only that part of the income derived from sources outside China which is paid by enterprises or other economic organizations or individuals which are inside China.
(3) Foreign individuals who have resided inside China consecutively or accumulatively for more than 90 days in any one Tax Year, shall, in accordance with relative provisions, pay individual income tax on their income derived from sources inside China.
(4) Foreign individuals who have resided inside China consecutively or accumulatively for not more than 90 days in any one Tax Year, shall, in accordance with relative provisions, pay individual income tax on their income derived from sources inside China. But their income which is paid by an employer outside China and which is not borne by the employer’s establishment or business place within China shall be exempt from individual income tax.
In as early as 1986, three preferential policies over related issues were put forward in the Circular of Taxation in Accordance with Relative Provisions on Income of Cultural and Educational Foreign Experts and Foreign Personnel after Their Wage Standards are Adjusted (Cai Shui Wai Zi [86] No. 275) released by the Ministry of Finance and the State Administration of Taxation. These policies include: firstly, for cultural and educational foreign experts and foreign personnel, individual income tax shall be levied on parts of the income derived from their wages and salaries; secondly, for cultural and educational foreign experts and foreign personnel, free houses, transportation and medical care provided by the Chinese part, and vacation subsidies and absent on leave subsidies shall be exempt from individual income tax; thirdly, for teachers and researchers from countries whose governments have signed with the Chinese government the agreement on avoidance of double taxation, related provisions in the agreement shall be applied.
In recent years, China has unveiled a series of related preferential taxation policies in order to strengthen the recruitment of foreign experts and high level overseas personnel of different fields. These policies can be summed up in three aspects:
I. Reduction or Exemption
According to the new Detailed Rules for the Implementation of the Individual Income Tax Law of the People’s Republic of China, amended according to Order No. 519 of the State Council of the P. R. China on February 18, 2008, there are 5 circumstances for the additional deductions for expenses of the individual income tax on the foreign nationals, which are:
(1) For foreign nationals working in foreign-invested enterprises, if they have resided inside China for more than one year and less than five years only to finish their tasks of clerical operations, with no intention of permanent residence, their income derived from sources inside China, whether by remittance or not, can be exempted from individual income tax.
(2) For personnel dispatched by donor countries to provide service for the construction projects in China which are offered by these countries as assistance gratis, their wages and production subsidy, whether paid by the China or other countries, shall be exempted from individual income tax.
(3) For cultural and educational foreign experts working in China, who have been recruited for more than two years, their wages and salaries paid by their home country shall be exempted from individual income tax.
(4) For foreign nationals who are working in the resident offices of foreign invested enterprises, foreign companies, enterprises, and other economic organizations in China and foreign businessmen working in China, they shall, in paying individual income tax on the income from wages and salaries, enjoy a reduction by one half of the rate that ought to be levied.
(5) For cultural and educational experts and economic experts from foreign countries, free houses, transportation and medical care and vacation subsidies and absent on leave subsidies, provided by the Chinese part during their working period in China, shall be exempt from individual income tax for now, and shall only pay individual income tax on the income from wages and salaries in accordance with the provisions of the Tax Law of China.
According to related provisions, the preferential policies foreign nationals enjoy related to the taxation of individual income are as follows:
(1) Foreign journalists stationed in news agencies of China, if whose home country has expressly stated that Chinese journalists stationed in the news agencies of their countries shall be exempted from individual income tax, will be exempted from individual income tax in China.
(2) Foreign nationals working in China, whom the dispatching foreign companies granted their contract funds, with wages and operating expenses included, shall be exempted from individual income tax.
(3) Foreign exports and service personnel on missions of assistance gratis or support shall be exempted from individual income tax.
(4) Pensions and annuities derived from outside China shall be exempted from individual income tax.
(5) Income from dividends, obtained by foreign individuals from foreign invested enterprises, shall be exempted from individual income tax; income from dividends, obtained by foreign holders of B-shares or overseas shares (including H-shares) from the issuing enterprises inside China, shall be exempted from individual income tax for now.
(6) Proper housing, food and laundry allowances gained by foreign individuals, in the non-cash form or in the form of being reimbursed for what they spend, shall be exempted from individual income tax.
(7) Moving allowances gained by foreign individuals due to their taking or leaving office in China, in the form of being reimbursed for what they spend, shall be exempted from individual income tax.
(8) Allowance of trip at home and abroad, paid to foreign individuals in rational standards, shall be exempted from individual income tax.
(9) Home leave fares gained by foreign individuals shall be exempted from individual income tax, provided the fares only cover the transportation costs for trips from the location where the foreign individuals are recruited to their home place (including the living place of their spouse or parents), and the frequency of these trips shall not be more than twice a year.
(10) Language training expense and educational expense for children gained by foreign individuals shall be exempted from individual income tax.
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(11) For individuals who have resided inside China consecutively for no more than 90 days, their income paid by an employer outside China shall be exempt from individual income tax.
(12) Cultural and educational foreign experts and overseas students who come to China shall be exempted from individual income tax.
II. Preferential Taxation Starting-point
The individual income taxation starting-point for foreign nationals has been raised from RMB 4,001 to RMB 4,801, according to the new Detailed Rules for the Implementation of the Individual Income Tax Law of the People’s Republic of China, before which, the deduction standard for them was RMB 4,000. This number is calculated by adding an RMB 800 deduction standard and an RMB 3,200 standard for the additional deductions for expenses. In the new Detailed Rules for the Implementation of the Individual Income Tax Law of the People’s Republic of China, the standard for the additional deductions for expenses remains the same RMB 3,200, but the deduction standard for income from wages and salaries is raised by RMB 800. Hence the deduction standard for foreign individuals is raised to RMB 4,800.
III. Rules on Mutual Exemption and Avoiding Double Taxation
The Circular of Exemption of Individual Income Tax for Teachers and Researchers from Countries that have Signed the Taxation Agreement with P. R. China (Cai Shui Xie Zi [86] No. 030), released by the Ministry of Finance and the State Administration of Taxation, speculates that for teachers and researchers from countries that have signed with China the agreements on avoidance of double taxation, taxation shall be carried out according to related provisions in the agreements:
(1) For foreign teachers and researchers from countries that have signed with China the agreement on taxation, and have been in China before the agreement is put into effect, their staying periods, not exceeding 3 years (some of them are 2 years), the amount shall be calculated from the date the agreement become effective.
(2) As stated in the agreement of taxation that has been signed and put into effect, for teachers and researchers from the other country, who have stayed or accumulatively stayed for no more than 3 years since their first arrival, their income gained from teaching, lecturing or researching shall be exempted from individual income tax.
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(3) It is stated in the agreement of taxation that has been signed and put into effect, that for teachers and researchers from the other country, whose income gained from teaching, lecturing or researching has be exempted from individual income tax during the 3 years or the first 3 years since their arrival, if their above mentioned activities last more than 3 years, they will be subject to individual income tax from the fourth year.
The Opinions on Building a Green Channel for High Level Overseas Chinese Returnees also has some special provisions for high level overseas personnel: High level overseas Chinese returnees who establish enterprises back China shall enjoy corresponding preferential taxation policies in accordance with the state industrial and regional taxation policies. Those who set up high-tech enterprises are subject to the state preferential policies for high-tech enterprises. Projects of strategic significance to China’s economic and technological development can be set up as special projects after being approved by related authorities, and be supported according to related regulations. If they have a business need to import small quantities of reagents, raw materials and accessories from foreign countries, the units they work for may go through relative formalities for them in accordance with the preferential taxation policies on scientific and educational supplies and technological development supplies. The State Council has stated in Several Supporting Policies for Carrying Out the “Outline of the National Program for Long- and Medium-Term Scientific and Technological Development (2006-2020)” (No. 6 [2006] of the State Council) that, for enterprises that undertake the state’s major projects for science and technology development, key projects of the state scientific and technological program, the state’s major projects for technology and equipment development and major projects for the import, digestion, absorption and innovation of overseas technologies, they can be exempted from the import duty and import value-added tax resulted from importing key equipments, raw materials and spare parts that cannot be produced domestically. The Chinese Central Government regulates that, for high level overseas personnel recruited by the “1,000 Talents Program” (also known as the “Recruitment Program for Global Experts”), in the first 5 years, parts of their wages gained inside China, including the housing, food and moving allowances, home leave fares, and educational expense for children, can be deducted pre-tax in accordance with related provisions of the state taxation laws and regulations. Besides, China also regulates that foreign investment production enterprises engaged in industries such as machine manufacturing, electronics, energy (with the exception of exploration of petroleum and natural gas), metallurgy (with the exception of exploration of rare metals and precious metals), chemistry, building materials, light manufacturing, textile, packaging, medical devices manufacturing, pharmaceuticals, agriculture, forestry, husbandry, fishery, water conservancy, building, and transportation (with the exception of passenger transportation) are entitled to preferential treatment of tax deduction and exemption; that Chinese-foreign equity joint ventures which are established in the State Council authorized new-and-high-tech industrial development zones and recognized as new-and-high-tech enterprises, can enjoy a reduced rate for corporate income tax of 15 percent; that any Chinese-foreign equity joint ventures scheduled to operate for a period of not less than 10 years may apply to authorities and may enjoy, if the application is approved, from its first year of profit the exemption of corporate income tax in the first and second years.
