We discuss the tax residency status of foreigners with a Chinese Permanent Residence ID Card and their tax liability on worldwide income in the country.
Many foreigners have concerns over getting a Chinese Permanent Residence (PR) ID Card as they are not sure whether this will impact their tax residency status in China, or whether they will be liable to pay tax on worldwide income in the country.
Typical concerns include a reluctance to apply for PR status in China even though it is troublesome to renew the alternative working visa each year. The reason for not applying are commonly held, yet inaccurate, opinions that residency would automatically incur liability for taxation on global income in China. Now, general perception holds that foreign employees only pay tax on the salary they receive in China but don’t need to pay tax on dividends received from the employer in another country, or income from other properties outside China. The same opinion holds that these incomes would be taxable in China upon becoming a “resident alien”, under which tax is due on worldwide income derived from any source. But this isn’t necessarily correct.
Does China’s tax resident status necessarily imply global tax liability?
In fact, for foreigners, being a China tax resident does not necessarily mean that they must pay tax on their worldwide income. Under Article 1 of the amended Individual Income Tax (IIT) Law, a ‘resident taxpayer’ is deemed to be:
- A person who has domicile (住所) in China, or
- An individual who does not have domicile in China but has resided in the country for (an accumulated) 183 days or more within a tax year (January 1 to December 31).
With a domicile in China, individuals are deemed as China tax residents. They shall be liable to pay tax on the worldwide income.
Without a domicile in China, according to the new “six-year rule”, foreigners who do not reside in China for six consecutive years (for at least 183 days each calendar year) will be exempt from paying taxes on income sourced outside of China.
This means that as long as a foreigner does not have a domicile in China, and they reset the six-year clock by leaving China for more than 30 consecutive days, they will only be taxed on the China-sourced income. The PRC IIT Law, in effect, makes it easier for foreigners working in China to avoid triggering tax liability on their worldwide income.
Does China PR ID card necessarily affect one’s domicile status?
However, the question is whether the China PR ID Card will directly determine one’s domicile status.
Under the PRC IIT Law, China does not have a statutory residence test with clear criteria to determine the domicile status. “Domicile” is generally defined as “habitual residence” (习惯性居住) in China because of the household registration, the location of family members, or economic interests.
“Habitual residence” does not mean the actual residence or the location in which one resides during a certain period of time. For example, if a Chinese person residing outside of mainland China because of their study, work, visiting relatives, or travelling will necessarily go back to living in mainland China when their reason for living abroad is eliminated. This person will be deemed as having “habitual residence” (domicile) in China, even if they do not have a place of residence in mainland China. Therefore, the legal concept of domicile (住所) in the PRC IIT Law is distinct from the word domicile (住所) as ordinarily used.
The concept is indeed not straightforward, even very subjective. Take another example – if a foreigner has a permanent home and their family in China, then their personal and economic relations may be considered closer with China than their country of origin. However, other factors – such as their historic residency, available accommodation in the home country, and where their other family members reside – may imply that they will eventually return to his home country. So, the tax residency status would seem to depend on the expectation about their behavior and future geographic domicile.
Coming back to the application of PR in China, obtaining the PR status doesn’t necessarily mean the foreigner has domicile in China, and the tax authorities will also take other factors we introduced above into consideration when determining the PR ID card holder’s tax liabilities.
On the other hand, if a foreigner obtains the Chinese PR, they are indeed at higher risk of being taxed on their worldwide income as Chinese tax authorities may reasonably conclude that they will most likely continue to reside in China and have no intention to return to their home county. Foreigners with Chinese PR ID card are thus advised to prepare sufficient evidence to prove that their habitual residence is not in China and their presence in China will be temporary.
In practice, we don’t see many cases of foreigners being taxed on their worldwide income, except for those who have their families (particularly dependent family members), community relations, and businesses all in China. The latter are almost deemed as Chinese citizens.
In case you are deemed by Chinese tax authorities as a China tax resident – but you are also a tax resident in another tax jurisdiction – your tax residency status will be determined in consultations between competent authorities of the two jurisdictions through an established procedure according to the double tax treaties. (See our article: Tax Residence, Individual Income Tax Liability in China and the UK: Q&A)
To sum up, for foreigners, being China tax residents do not necessarily mean they will be taxed on their worldwide income in China. They can leverage the “six-year rule” to circumvent the tax obligation on their global income.
Chinese PR status does not directly determine whether a foreigner has a domicile or habitual residence status in China. That is to say, the China PR status does not necessarily hold a foreigner taxable for their worldwide income in China.
However, PR ID card holders will be at higher risk of being recognized as having domicile in China by the tax authorities. They are highly recommended to consult local tax experts to do necessary arrangements to avoid being taxed on their worldwide income in China. For more information and assistance, please email us at China@dezshira.com.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.