In the context of China’s Individual Income Tax Law, which took effect on Jan 1st, 2019, and the many regulations alongside it, the terms domicile and residence are used frequently. But what do these terms mean and which tax labilities in China result from either status? We will take a closer look at these terms specifically in a tax context. As legal terms, they are also of relevance in other matters, too, such as inheritances and wills.
Generally speaking, a person’s liability to Chinese tax is determined by the person’s domicile and residence status. Chinese taxation law differentiates between:
(1) a domiciled individual,
(2) a non-resident and non-domiciled individual or
(3) a resident but non-domiciled individual.
But what distinguishes a domiciled individual from resident? Below we will define these terms and their importance in determining your tax liability as a foreigner in China.
If you live in your home country you have probably never worried where your domicile, in a legal and tax context is. But chances are that you are living abroad and reading this because you are wondering if you are domiciled or resident and how it affects you tax or legal matters (e.g. succession, inheritances and wills).
Legal dictionaries define a domicile as “the place where an individual has a fixed and permanent home for legal purposes” (Link: https://www.merriam-webster.com/dictionary/domicile#legalDictionary). Most common is the domicile by origin – you are domiciled in your country of origin, e.g. here you were born and have citizenship. Additionally, there is domicile by choice. This may be the case when you have established a permanent home in a country other than the home country and intend to stay permanently or indefinitely.
Moving abroad for a new job or as part of an assignment does not automatically make you domiciled in this country. You are considered non-domiciled in the country you have moved to. Often, it will change the status of your tax residency, though.
Residence: the 183-day-rule
In China, as in many other countries, individuals are taxed in accordance with their length of stay. Many countries around the world assess your residence status based on the so-called 183-day-rule. Individuals without a domicile in the People’s Republic of China (PRC) are classified as tax resident when staying for more than 183 days per calendar year in China. This results in different tax liabilities then when you are considered a non-resident for tax purposes.
As a tax resident, the next important threshold concerning the length of your stay in China is the 6 year mark. An individual who has been a resident of China for 6 consecutive years or less is taxed on income sourced in China only. After 6 consecutive years as a tax resident in China, non-domiciled individuals may be taxed in China on their worldwide income.
If you are domiciled in China, you are automatically considered a tax resident, regardless of the length of your stay.
Determining the length of your stay: which days count?
In March 2019, China issued announcement no. 34 containing guidelines for non-domiciled taxpayers under the new Individual Income Tax (IIT) Law, clarifying (among other things) the calculation method for the length of stay in China. Under the new rules, any day on which the person is not physically present in China for 24 hours does not count as a day in China. Therefore any departure or arrival days do not count towards the 183 day threshold for tax residency.
For more information about Announcement no. 34, which also has details on how to calculate the taxable income, please read our article here. (Link: https://ecovis-beijing.com/iit-update-new-guidelines/)
China’s Double Taxation Agreements (DTA)
To avoid double taxation and to prevent fiscal evasion with respect to income and capital, the People’s Republic of China signed double taxation agreements with many countries, among them also Germany. The Agreement between China and Germany first took effect in 1985. A new agreement, replacing the previous one, was signedin 2014 and took effect in April 2016. (Link to DTA: http://www.chinatax.gov.cn/n810341/n810770/c1153094/part/1153095.pdf)
The Double Taxation Agreement clarifies rules for tax liability in the case that a person is considered a tax-resident of both contracting states. In this case, the “centre of vital interests” or the “habitual abode” can be used to determine the country of tax residency.
Most foreign taxpayers in China will still be considered domiciled in their home country. The tax residence status is subject to change more often and is determined by the length of stay. Based on if it exceeds 183 days in a year, a change in tax residency status has profound impact on the tax liability in China. Discuss this issue with your employers HR department or an independent tax consultant.
For more information about China’s Individual Income Tax law and regulations please refer to our website, where we keep posting updates on current tax and legal developments. For an individual consultation, please feel free to contact us.
About the author
Iris Wang, Tax Manager
Iris has more than nine years of experience in tax compliance and consulting services. Her field of expertise is tax planning and optimization for expatriates, payroll and individual income tax consulting and structuring services. Before joining ECOVIS Beijing, she worked in Big Four companies where she advised many international clients.
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 10-65616609 or contact us directly via firstname.lastname@example.org.