Tax guide for Americans in China
Wherever you live in the world, you are obligated to file a US expat tax return with the IRS reporting your worldwide income. Along with the regular US expat tax return for income, many individuals are required to submit a report disclosing assets in foreign bank and financial accounts or FBAR, by using FinCEN Form 114 (FBAR). What about tax returns for Americans who reside within China? As a US expat in China, you may need to file a Chinese return and pay taxes on your income to the Chinese Government. Here are some simple guidelines on dealing with and the obligations for filing Chinese taxes.
Not sure what to do? Do you have questions about your own tax situation?
We focus in dealing with past due tax returns. The IRS is offering delinquent taxpayers a new special filing procedure called Streamlined procedures that may benefit you if you have not filed your US expat tax returns in years. With our help, we can get you back on track with the IRS.
What if I am paying income taxes in China? Do I have to pay taxes to the US?
The US and China has a tax treaty that can offer taxpayers additional benefits. We can help you with all treaty benefits.
Preparing US expat tax return can be complicated because of the tax laws for Americans citizens and Green Card Holders living abroad. There are many tax dangers with filing a US tax return for expatriates and green card holders, but there are also many opportunities to cut or eliminate your US expat taxes. If you are an American working overseas check out our free tax guide.
The Chinese Tax System
Since many US expatriates are living in China, it is necessary for Americans to know both Chinese and US expat tax laws. This tax guide adds to your understanding of the Chinese income tax system by giving practical knowledge. The official currency of China is the ‘renminbi’. General information about China Government of the People’s Republic of China.
China has a multi-tiered system of tax liabilities for foreigners, which has led to some confusion, particularly over the so-called 90- or 183-days rule. For those sent to China by a foreign company, who have their salary paid elsewhere (probably in their home country), and spend over 183 days of a calendar year in China (or 90 if they are from a country that does not have a double tax treaty with China), they need to pay IIT in China-based on the number of days they spent in the country.
The Chinese residency system is a lot more complicated when compared to other countries. A person is either a domicile or non-domicile of China. Domiciles are persons with a Chinese passport or hukou. The Hukou system is the system for household registration. Most of the foreigners living in China are non-domiciles.
Any foreigner living in China is initially taxed for income earned in China. For tax purposes, a foreign national who has lived in the country for the whole tax year is considered a resident and must pay taxes for their Chinese income.
If this person lives outside the People’s Republic of China for over 30 days (continuously) or over 90 days (cumulatively), the resident status is lost for that year and no income tax is owed.
After a person is a resident of China for 5 years consecutively, they get taxed for any income earned in other countries. Another factor that plays a role in the taxation for expats is their post in the company employing them. Professionals at senior positions are taxed for both Chinese and global income from the start. The State Administration of Taxation keeps track of all the expats eligible for taxation in China. All foreign nationals are expected to register with them. Whenever the non-domicile finishes their work assignment or is laid off from their job, all taxes should be settled before leaving the country.
Taxable Income and Rates
Taxable income includes all compensation received by an employee, including amounts received directly or indirectly from the work performed for the employer. The following list includes typical items of an expatriate compensation package which are taxable in China.
It is mandatory for all expats (that are eligible for taxation) to file taxes monthly. Depending on the annual income and other factors, they might have to file taxes at the end of the year.
Expats that have not been Chinese residents for 5 consecutive years and are not in China for that entire tax year, are not required to file a Chinese tax return.
The People’s Republic of China is very strict about filing taxes by the deadline of March 31st each year and does not grant any extensions. Anyone not following the deadline is fined.
The Chinese income tax rates depend on the individual’s yearly income and can be a maximum of 45%. Let us look at these tax brackets or bands briefly –
Expats are eligible for a monthly deduction of 4800. There are a few other exclusions in place for expats – Certain benefits-in-kind provided foreign national employees individuals are exempt from tax provided that the amounts are reasonable and substantiated by receipts and other supporting documentation. These include:
Social Security in China
Social Security in China is known as the Social Insurance system. It takes care of many aspects of social welfare including disability, unemployment, maternal care etc. Expats are expected to contribute to this system even though it is unknown whether they can ever benefit from it. On average, employees pay 10% of their income into the system and their employers pay 40%. The US does not have a Social Security agreement with China; this is one area where US tax for expats may be doubled.
Other Chinese Taxes
After income tax, here are some of the other Chinese taxes –
Not all of these apply to expats.
Filing your Chinese Taxes
Every expat earning income in China must file taxes monthly. Typically, your employer will be required to pay taxes for you on a monthly basis. They may also require you to file a return if you have more than one Chinese employer, have income earned in China from which taxes were not withheld. If the income is over 120,000 annually they must also file taxes annually.
Taxes for the income earned in a month should be filed by the 15th of the next month. The Chinese tax year is the same as the US. It is mandatory to file by March 31st. If this deadline is not met, it can cause a penalty on the tax payer. There is no joint tax return in China. Husbands and wives are assessed and taxed separately.
Tax returns must be filed on a timely basis. Extensions to file may be granted under ‘special circumstances’ only. It requires annual filing within 3 months of the end of the tax year for individuals who have lived in the PRC for a full tax year and whose annual income exceeds RMB 120,000.
Are You A US Expat with Questions?
Contact us today to learn more from our expat CPAs and IRS Enrolled Agents. We can answer questions and start on your US expat taxes.