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26-04-2019

China Clarified “Six-Year Rule” for Tax Residency for Foreigners

Introduction

On March 16 2019, China’s Ministry of Finance and State Taxation Administration published the Announcement on the Criteria for Determining the Residence Time of Individuals without Domicile in China (Announcement [2019] No. 34, click here for the official announcement). The Announcement explains how the tax residency of foreigners (including residents of Hong Kong, Macau and Taiwan for tax purpose) in China will be calculated.

Background
On August 31, 2018, China passed the second draft of the Individual Income Tax Law (the “IIT law”), which revised the criteria for determining resident taxpayers and non-resident taxpayers.

On December 18, 2018, China passed the Implementation Regulations of the Individual Income Tax law (order No. 707). As we have introduced in our article in January 22 (click here for the full text), order No. 707 changes the term of determining tax residency for foreigners from “five-year rule” to “six-years rule”. 

Since January 1st, 2019, both IIT Law and order No.707 have come into full effect. Following that, China’s Ministry of Finance and State Taxation Administration jointly published Announcement [2019] No. 34 to further clarify how it will implement the “six-year rule”, including the start date of calculation and calculation standard for days of residence.

What is the “Six-Year Rule”?
A foreign individual who has no domicile but has resided in China for an accumulated 183 days within a tax year will be deemed as a tax resident in China. If a foreign resident holds the tax resident status for 6 consecutive years, their income sourced both domestically and overseas shall be subject to individual income tax in China.

However, if the accumulated days of residence for a foreign individual in China in any of the previous six years are less than 183 days or their single departure outside Mainland China in any point during the 6 years is more than 30 consecutive days, their overseas income will be exempted from individual income tax.

Please find a flow chart here for the understanding of the determination of tax residency under “6-year rule”. 
 

When does the six-year calculation start?
The starting year of the six years calculation is 2019. Residence in years before 2019 will not be taken into account. Therefore, non-domiciled foreign individuals can not be deemed to fulfill the “6-year rule” until at least 2024. The previous “5-year rule” has been abolished and will not apply to the period between 2019 and 2024. In other words, all overseas source incomes of non-domiciled foreign individuals are exempted from individual income tax until 2024. (Please click here for the official explanation.)

As explained above, please note that if there is a single departure outside Mainland China for more than 30 consecutive days in any year starting from 2019, the previous consecutive year’s calculation shall be reset to zero and the calculation shall restart in the next tax year.

How to calculate the days of residence in China?
A single day of stay in China will be deemed as a day of residence if it lasts for 24 hours. Anything under 24 hours will not be counted as part of the total days of residence.

For example, if a non-domiciled foreigner living in Hong Kong goes to work in Shenzhen every Monday morning and returns back to Hong Kong every Friday night. Monday and Friday will not be counted into the days of residence in China since the time of stay is less than 24 hours, so the counted number of days per week is 3 days. Therefore, the total days of residence in the whole year will be 156 days for 52 weeks, which is less than 183 days. So such a foreigner will not constitute as a resident individual and their overseas source income will be exempted from individual income tax.

 

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