According to the FIFA/Coca-Cola World Ranking, China’s male footballers are currently ranking 81st among all member states. Nonetheless, China’s own domestic league, the Chinese Super League (CSL), broke records recently, when its clubs went on an international buying spree, hiring such illustrious players as Carlos Teves, who left Boca Juniors for Shanghai Greenland Shenhua FC for an alleged sum of 84 Million Euros, or Oscar from Chelsea, who changed employers for over 60 Million Euros and went to Shanghai Shenhua’s local rival Shanghai SIPG. In total, Chinese clubs spent over 280 Million Euros in this winter’s transfer window alone.

 

The long walk of Chinese Football

 

After China’s national team in 2002 for the first time participated in a World Championship, the Chinese domestic league attracted more attention from fans and politicians alike. But instead of athletic performance, China’s own football clubs excelled in scandals and corruption.

 

In 2004, the disgraced Jia A League was replaced by the new CSL after reports had revealed that at least half of all matches of the previous season had been rigged. But the new League failed to eradicate the bad habits and the influence of gambling syndicates. In 2010, the former boss of China’s Football Association (CFA). Nan Yong and his deputy Yang Yimin were arrested on corruption charges. The problem was so pervasive that players had to bribe officials to be selected for the national team and to pay even more money if they wanted to actually play.

 

With Xi Jinping, himself a football aficionado, becoming the chairman of the CCP and the country’s president in 2012, the corruption problem in China’s football turned into a national policy issue and his notorious anti-corruption campaign did not stop at the CFA’s gate. In 2013, 33 players and officials were suspended for match fixing.

 

But Xi’s ambition is not limited to merely cleaning up a profoundly rotten system. As the country’s declared football fan No. 1, he aspires to see China’s football succeed on the international stage. In 2015, Xi announced the ‘Chinese Football Dream’, declaring that China aims not only to become an economic superpower, but also a world football superpower. One year later, the CFA published its “Chinese Football Medium- and Long-term Development Plan”.

 

Besides the plan to build a football pitch for every 10 000 Chinese citizens, the document also proclaims that China’s team should win the Asian Championship by 2030 and be able to win the World Cup by 2050.

  

The plan also makes clear that this strategy is not only an exercise in national pride and athletic vanity. It lays a heavy emphasis on infrastructure projects, funneling billions of RMB into the Chinese economy, and promotes the development of a multi-million merchandise and fan industry. In view of the government’s objective to wean China’s economy off heavy industry and an export-led growth model, a successful and profitable football industry is thus seen as an important hallmark in China’s overall development strategy. 

 

Football and Big Money

 

With the political significance came the big money. But despite the declared goal of fostering homegrown talents and excellence, Chinese clubs have - once again, one might say - succumbed to short-term thinking and a get-rich-quick mentality.  In 2016, the total amount spent on transfers was over 470 Million Euros, more than the sum of the two previous years combined.

 

But instead of investing in domestic players, Chinese clubs have surpassed each other in hiring foreign players. Prior to Teves’ record-breaking transfer, Brazilian midfielder Alex Teixeria and his compatriot Hulk had already signed contracts worth 50 Million Euros and 55.8 Million Euros respectively.

 

The CSL has currently 96 players from 32 different countries, although, according to statistics from the CIES Football Observatory, with a percentage of slightly over 21.1% in early 2016 the CSL still ranks far behind major European leagues.

 

But the presence of foreign football mercenaries has already distorted Chinese football. Thus, in the last decade, only one Chinese player, Li Jinyu, won the title of the league’s top scorer, whereas Brazilian players ranked top 6 times. This is the same national vs. foreign player ratio as in the English Premier League, which has the highest percentage of foreign players worldwide, and where Tottenham’s Harry Kane became the top scorer in last year’s season, the only English player doing so during the last decade. 

 

Football and Tax Compliance

 

However, the CFA has now tried to step in and has reduced the number of foreign players, who can be fielded at any time, from 4 to 3. Nonetheless, the clubs’ sudden fit of generosity has not only raised questions about the financial sustainability but also, especially in the light of the recent revelations caused by Football Leaks, about tax compliance.

 

In ignorance of the actual contract details, we can only speculate whether Chinese clubs resorted to the same tricks as their foreign peers. Nonetheless, China’s tax law might offer some clues about possible loopholes and tax saving possibilities.

 

In principle, there are three main possibilities. First, the player is normally employed. Second, the player signs a service agreement with the club. In both of these cases, the player would have to pay taxes for the entire time he or she is working in China. Finally, the player is only invited but remains employed by a foreign entity. In this case, the obligation to pay Chinese IIT is dependent on the total duration he or she spends in China. 

 

Double Tax Agreements

 

In the first case, the player is fully employed by the Chinese club. Since foreign football players are foreign residents, their tax obligations are then subjected to the Double Tax Agreements (DTA) between China and their home countries.

 

In the case of Oscar, the DTA between Brazil and China from 1991 applies. Like in most DTAs, Article 17 of the agreement between the two countries regulates the taxation of artists and athletes. Thus, Art. 17 (1) states that “income derived by a resident of a Contracting State as […] an athlete, from his personal activities as such exercised in the other Contracting State, may be taxed in that other Contracting State.” Art. 17 (2) further provides that this local tax obligation also applies, if the income is not paid to the athlete directly, but to another person or entity instead. 

 

This clause exists in both the OECD model convention for bilateral tax treaties as well as the UN model convention, which both serve as the basis for most DTAs worldwide. But for an exact interpretation of the different articles in Chinese bilateral DTA’s, the circular of China’s State Administration of Taxation (SAT) with regard to the China-Singapore DTA (Guo Shui Fa [2010] No. 75) is usually taken as a reference.

 

If no such DTA exists, as in the case of Teves, where only an agreement on the exchange of information relating to taxes has been signed, the player is usually treated like a local employee although in this case, the risk exists that he will be taxed by his home country too.

 

China’s Individual Income Tax System

 

China has adopted a progressive taxation system for its Individual Income Tax (IIT). To understand how foreigners working in China are liable to pay IIT, it is important to know about several key factors. Whether IIT needs to be paid by an expat in China or how much IIT needs to be paid depends on: 

 

- How much the expat earns;

- How long the expat stays in China;

- Who bears the expat’s income; and

- What kind of positions the expat is holding in his host country and home country company.

 

First of all, it needs to be clear which portions of the money a player receives from the employer are deemed to be taxable income by the Chinese authorities. This includes the base salary, incentive compensations, such as commissions and bonuses, cash allowances and contributions to an overseas insurance scheme. The tax rate levied on that taxable income then depends on its cumulated amount.

  

China adopts a progressive taxation system where the tax rate for freelancer’s incomes progresses in three levels from 20% to 40% and the tax rate for regular employees in seven levels from 3% to 45%. A tax exemption of 4800 RMB per month for expats and of 3500 RMB per month for Chinese citizens are granted. Furthermore, for each individual taxation grade, there is a quick deduction amount that will be exempted for this level of taxable income.

 

Thus, a quick formula to calculate the IIT burden is:

 

[(Gross Monthly Taxable Income – 4800) * Tax Rate] – Quick deduction = Tax Amount

 

If we take Oscar’s presumed monthly salary of about 1,6m euro (ca. 12m RMB) as an example, we would, therefore, have the following calculation:

 

[(12 000 000 RMB – 4800) * 0,45] – 13 505 RMB = 5,4m RMB

 

Notwithstanding the regulations of the DTA, there are a couple of exceptions. First of all, Article 17 (3) of the Brazil-China Agreement stipulates that “income derived by entertainers or athletes who are residents of a Contracting State from the activities exercised in the other Contracting State under a plan of cultural exchange between the Governments of both Contracting States shall be exempt from tax in that other Contracting State”. That means that, hypothetically, Oscar’s stint in Shanghai could be labeled as a ‘cultural exchange’, whereby he would be exempted from all tax obligations towards the Chinese state.

 

Additionally, in some cases, Art 17 (1) might be interpreted in a narrower sense. As the UN commentary to the paragraph suggests, the rule might only be applied to ‘independent’ activities. Consequently, foreign football players employed by Chinese clubs might benefit from the exemptions stated in Art. 15 (2) of the DTA, such as allowances for Chinese social security insurances; allowances for meals, laundry, relocation, and housing; home-leave for the expat for up to 2 round-trips per year, fees for Chinese language training; and tuition fees for the education of the expat’s children.

 

For such benefits to be tax-exempt, certain conditions need to be met. Otherwise, they will be treated as normal taxable income. First of all, the overall amount of benefits provided has to be reasonable, which means it generally should not exceed about 30-40% of the gross base salary. Furthermore, the benefits cannot be provided on a cash basis, but rather need to be paid to the employee on a non-cash or reimbursement basis, for which an official tax receipt (Fapiao) is mandatory. For example, a housing allowance can only be tax exempt if (a) either the employer pays rent to the landlord directly or if (b) the employee pays the rent on his own and then provides the Fapiao for his/her payment to the employer, who reimburses the amount.

 

As for any expat, foreign players employed by a Chinese entity need to be aware of certain time thresholds, in particular, if they are famous around the world and have received income from various sources in different countries, for example, via commercial or merchandise contracts.

 

The most important threshold is the so-called Five-Years rule, which states that an expat who is a tax resident in China for a consecutive five years will have to pay PRC IIT on all of his income, no matter where it was derived and no matter by whom it is born. That is, after five years of tax residency, an expat will be taxed in China on his/her worldwide income.

However, there are two possible scenarios in which IIT liability on the expat’s world income could be avoided.

 

Scenario 1: Before the fifth year

  

The first scenario is that the player leaves China, be it for business purposes or for visiting his home country, for more than 90 days consecutively or more than 30 days for a single trip within any given year before he/she has been a tax resident for 5 years. By doing this, the expat has broken tax residency and the “clock” for the 5-year-rule will be reset. For example, the expat can arrange to leave China for the necessary time period in the fifth year of his tax residency. Upon his return, tax residency will then be calculated from year one again.

 

Scenario 2: After the fifth year

 

In the second scenario, the expat might have missed the deadline for leaving China for an appropriate amount of days and has already been a tax resident for more than 5 years. Now there are two possibilities for the player: (1) For the sixth year, he or she could arrange to spend more than 90 consecutive or more than 30 days in a single trip outside of China. This would mean that the expat has broken tax residency in this year. All of his China source income will be subject to IIT, but his world income will not be. However, this measure will not “reset the clock” of the 5-year-rule and has to be repeated in the seventh and all the following years. (2) If in the sixth year the player stays in China for less than 183/90 days (depending on the tax treaty between his home country and China), then the tax residency is also broken. Only his/her China sourced income borne by a Chinese entity will be subject to IIT. Furthermore, the “clock” of the five-year rule will also be reset and this measure thus does not need to be repeated every year. In other words, if the player manages to travel out of China for more than half/three-quarters of the sixth year, the five-year-rule will not be applicable anymore. In addition, upon his return, his tax residency will be calculated from year one again.

 

Bonus Payments

 

Another way of structuring a salary to reduce the IIT burden for (foreign and Chinese) employees is the implementation of an annual bonus. Such a bonus will receive preferential tax treatment: it will be divided by twelve to determine the corresponding monthly amount and will be taxed according to the respective tax bracket of this monthly amount. This leads to lower taxation than the same amount being paid together with the monthly salary. However, this preferential treatment will only be applied to one bonus payment per year; other bonus payments will be taxed at the regular rates.

 

Scenario 1: Quarterly bonus

 

Let us again assume Oscar’s income with a base salary of 12m RMB per month and a quarterly bonus of 200 000 RMB. The tax rate for the base salary is 45% and the IIT burden on it will be 5,4m RMB. Three of the four bonus payments will be treated as being part of the base salary: the amount of those bonus payments will be divided by twelve and added to the monthly base salary in order to determine the tax rate. Note that in ordinary cases, when the base salary is much - and in the case of a professional football player very much - lower  than in this example, this might also lead to the base salary itself being taxed at a higher rate, since adding the bonus payments could push the salary into a higher tax bracket.

 

In our case, however, the base salary with the bonus payments will still be taxed at a rate of 45%. The IIT burden on this part of the bonus is, therefore:  3* 200 000 RMB * 0.45 = 270 000 RMB. The fourth bonus payment, however, will receive preferential treatment and be taxed at a rate of 25%, since this corresponds to the tax rate that one-twelfth (200 000 RMB/12 = 16,666 RMB) of the bonus would be taxed with. The IIT burden on this part is therefore: (200 000 RMB * 0.25) – 1 005 RMB = 48 995 RMB. The total IIT burden on the bonus is now 318 995 RMB.

 

Scenario 2: Annual bonus

 

Consider now a salary arrangement with the same base salary of 12m RMB and the same total annual bonus amount of 800,000 RMB, but paid only once per year instead of quarterly. The tax burden on the base salary is, of course, still 5,4m RMB. The tax burden on the bonus is lower though since the whole bonus now receives preferential treatment. It will be taxed at a rate of 35%, as the amount of one twelfth of the bonus (800 000 RMB/12 = 66,667 RMB) falls into this tax bracket. The IIT burden on the bonus is therefore: (800 000 RMB * 0.35) – 5 505= 274 495 RMB. As opposed to the first scenario, a total of 44,500 RMB per year can be saved on IIT.

 

However, for high-income earners, such Oscar or Teves, this would only be applicable, if the annual bonus is less than 960 000 RMB because its 12th fraction would then fall into the next lower tax bracket of 35%. Otherwise, the highest tax rate would still apply.

 

But a further part of bonuses could be paid out tax-free if they are made contingent on the victory of national and international championships. As Article 4 (1) of China’s Individual Income Tax states, premiums issued by provincial governments or international organizations for sports events are tax-free.

 

Service Agreement

 

Instead of a full employment agreement, the player could also enter into a service agreement, by which he or she offers his or her skills as an independent service provider. In this case, the player would be considered to be a freelancer and different rates of IIT would apply.

 

For service fees, there are two rates of deduction. For fees lower than 4000RMB, 800 RMB can be deducted. For all fees higher than 4000 RMB, 20% of the amount will be tax exempted. The remaining fee is then considered as the taxable income.

 

The IIT tax rates are then 20% for income below 20 000 RMB; 30% for income between 20 000 and 50 000 RMB; and 40% for all taxable income above 50 000 RMB. The respective quick deductions are 0, 2000, and 7000 RMB.

 

If we now take again Carlos’ presumed monthly salary of 12m RMB, then we arrive at the following calculation:

 

[(12 000 000 - 12 000 000 * 0.20) * 0.40] – 7000 RMB = 3,8m RMB

 

In contrast to the normal IIT for employees, freelancers are also liable to VAT, including surcharges. The standard VAT rate is 17%.

 

Invitation from a Foreign Entity

 

If we assume that the player remains employed by a non-Chinese entity, time apportionment is crucial. In order to determine a player’s IIT liability, we would need to look at the duration of his/her stay in China. The relevant thresholds for IIT liability are 1 day, 90 or 183 days. In combination with the third important factor, the source of payment for the expat’s income, we can then determine on which part of his/her worldwide income an expat needs to pay IIT in China.

 

If the player’s income derived from his work in China is borne by an overseas entity, and he/she stays in China for more than 90 days, this income is subject to PRC IIT. If there is a tax treaty between China and the expat’s home country, this threshold is usually extended to 183 days. In other words, if the player avoids, in one way or another, to stay in China for more than 90 consecutive days or 183 days in total in any 12 month periods, his Chinese income is tax-free.

 

However, this would only be possible, if the offshore company could avoid the creation of a Permanent Establishment within China, which has become rather difficult, given the increased number of audits by Chinese tax authorities.

 

Conclusion

 

In order to determine, which of the above-mentioned arrangements constitutes the best tax-saving solution for foreign players, the exact contents of the contract have to be known. Furthermore, there might also be the possibility that Chinese clubs, who are the tax withholding agent, simply do not care or have other possibilities to deduct the tax burden via other means from their corporate income tax bill.

 

But regardless of the various ways for players and clubs to benefit from tax exemptions and benefits, the ridiculously high transfer fees currently offered by Chinese clubs will probably be gone soon. On 18 January 2017, the CSL announced an 18-points catalog of new measures for clubs of the first and second league. Point 4, by explicitly quoting Oscar’s case, suggests that transfer fees will be capped at 30m Euro. Fees above this limit will either be heavily taxed or clubs will have to pay a share of this sum into a Football Development Fund. China’s cash surplus will then have to look for a new target.

 

ECOVIS Beijing is a consultancy focusing on accounting, audit, tax, legal, and FDI advisory for foreign SMEs and Start-Ups in China. For more information, please visit our website ecovis-beijing.com or contact richard.hoffmann@ecovis-beijing.com.

 

		Richard Hoffmann Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: This email address is being protected from spambots. You need JavaScript enabled to view it.
Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up for our Newsletter, give us a call +86 (10) 6561 6609 or contact us directly via This email address is being protected from spambots. You need JavaScript enabled to view it.