To provide further clarity on the PRC individual income tax (IIT) treatments for non-PRC-domiciled individuals under the Amended PRC IIT Law and its Implementation Rules2, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly issued two new public notices regarding the "Determination of Duration of Residency for Individuals Without Domicile Inside the PRC" (Public Notice 2019 No. 34) and the "Determination of Source of Income, Taxable Income and Tax Liability for Individuals Without Domicile Inside the PRC" (Public Notice 2019 No. 35). The rules were promulgated on 14 March 2019 and have taken effect nationwide retrospectively from 1 January 2019.

Clarification on New PRC Tax Residency Rule

Six-Year Tax Residency Rule

The PRC tax residency status of a non-PRC-domiciled individual generally depends on the duration of his/her stay in the PRC in a tax year. Under the Amended PRC IIT law and its Implementation Rules, a non-PRC-domiciled individual who spent 183 days or more in a given tax year (Qualified Year) in the PRC will be considered a PRC tax resident. However, as long as such non-PRC-domiciled individual is present in the PRC for not more than six consecutive Qualified Years, his/her income sourced from offshore and not paid or borne by any PRC entities will not be subject to PRC IIT upon recordal with the relevant PRC tax authority. This six-year period shall be deemed broken if the non-PRC-domiciled individual, in any Qualified Year, has a single trip of over 30 days outside the PRC. In such case, the duration of his/her tax residency in the PRC will be recounted from the following Qualified Year.

Day Counting Rule

Public Notice 2019 No. 34 provides guidelines for determining whether a non-PRC-domiciled individual spends one single day in the PRC. The amended rule provides that a non-PRC-domiciled individual will be deemed to have spent a day in the PRC if he/she is physically present in the PRC for 24 hours on that day. In other words, the day on which the individual arrives or departs from the PRC will not be counted as one day in the PRC so long as the individual is not present in the PRC for the entire day of 24 hours. The new deeming rule obviously is more favourable to non-PRC-domiciled individuals as compared to the old rule, under which, part of a day will be counted as one day for calculating the number of days spent by the non-PRC-domiciled individual in the PRC.

We illustrate the above amended rules using an example below.

Example:

  • Mr. Wong is a Hong Kong resident employed by a Hong Kong entity but often needs to travel to work in Shenzhen.
  • Mr. Wong goes to work in Shenzhen from Hong Kong on Monday, and will travel back to Hong Kong on Friday of the same week.

According to Public Notice 2019 No. 34, Mr. Wong is considered to have resided in the PRC for 3 days in a week since Monday and Friday, on which Mr. Wong only spends part of each day in the PRC, will not be counted as two days for PRC IIT purposes.

If Mr. Wong continues this travel pattern during the entire year, he will only be regarded as resident in the PRC for 156 days (3 days x 52) during a tax year and thus will not be treated as a PRC tax resident for PRC IIT purposes. If Mr. Wong's salary is paid and borne by his Hong Kong employer, he will not be subject to RPC IIT.

Taxation of Worldwide Income

Public Notice 2019 No. 34 further illustrates when and how a non-PRC-domiciled individual is taxed on his/her worldwide income:

  • Fresh start: The counting of the "six consecutive Qualified Years" shall start from 2019. This means, years on and before 2018 will be disregarded in counting of the "six consecutive Qualified Years", and non-PRC-domiciled individuals are only likely to be considered present in the PRC for "six consecutive Qualified Years" after 2024.
  • Worldwide taxation: If a non-PRC-domiciled individual who has resided in the PRC for the preceding "six consecutive Qualified Years" did not have one single trip of over 30 days in any tax year during that period, he/she will be subject to PRC IIT on worldwide income in the seventh Qualified Year. In this connection, in order to break the six-year tax residency rule, the non-PRC-domiciled individual is required to leave the PRC for a trip of more than 30 consecutive days in the sixth year the latest. In doing so, the "six consecutive Qualified Years" in respect of that individual will be recounted starting from the seventh year. However, if the non-PRC-domiciled individual could not make a trip or trips of 30 days outside the PRC during the preceding "six Qualified Years", he/she can only avoid from paying PRC IIT on worldwide income if his/her total PRC days in the seventh year and/or the subsequent years will not reach 183 days in a year.

PRC IIT Treatments for Non-PRC-Domiciled Individuals

Public Notice 2019 No. 35 was published to provide further guidance on the following matters:

  • determination of China-source income and taxable salaries of non-PRC-domiciled individuals,
  • calculation of PRC IIT of non-PRC-domiciled individuals
  • application of tax treaties by non-PRC-domiciled individuals working in China,
  • tax administration related issues.

With the introduction of Public Notice 2019 No. 35, a number of old tax rules and regulations were repealed.

Same as the old rules , a non-PRC-domiciled individual who holds dual positions in both an enterprise or establishment located inside the PRC and one located outside of the PRC may calculate his/her PRC IIT obligation by applying the time apportionment method. The difference, however, is that, under the old rules, a non-PRC-domiciled individual should calculate total IIT payable based on his/her aggregated salary income and the PRC IIT payable will then be calculated by apportioning the total IIT payable based on the number of days spent by the inside and outside of the PRC in a given month.

Under Public Notice 2019 No. 35, a non-PRC-domiciled individual shall apportion the aggregated salary income based on the number of days spent inside and outside of the PRC in a given month to determine his/her China-sourced income (i.e. income derived by the individual during the actual course of working in China) and PRC IIT payable will then be calculated based on such China-sourced income. This may effectively reduce the applicable marginal IIT rate and therefore IIT obligations of the relevant non-PRC-domiciled individuals.

Illustrative Examples under Different Scenarios

Public Notice 2019 No. 35 provides detailed guidance as to how to calculate the taxable employment income derived by non-PRC-domiciled individuals in different scenarios.

Below we have summarized in tabular form the general rules under Public Notice 2019 No. 35 with respect to when and how a non-PRC-domiciled individual is subject to PRC IIT. This table assumes the non-PRC-domiciled individuals are from countries and regions that have not entered into bilateral tax treaties with the PRC.

A. Taxable income of a given month = Total employment income received in the month × [(employment income received from inside of the PRC/total employment income received inside and outside of the PRC in the month) × (number of days inside of the PRC in the month/total number of days in the month)].Applicable Formula:

B. Taxable income of a given month = Total employment income received in the month × (number of days inside of the PRC in the month/ total number of days in the month)

C. Taxable income of a given month = Total employment income received in the month × {1- [(employment income received from outside of the PRC/total employment income in the month) × (number of days outside of the PRC in the month/total number of days in the month)]}

D. Taxable income of a given month = Total employment income received in the month × (employment income received from inside of the PRC/total employment income received in the month)

Taxation of Bonus and Stock Incentive Income

Public Notice 2019 No. 35 also clarifies taxation of bonus and/or stock incentive income derived by non-PRC-domiciled individuals. For instances, in calculating the PRC IIT for a type 2 resident who has spent less than 183 days in the PRC in a given tax year and derives, several-months bonus or stock incentive income, such bonus and stock incentive income shall be treated separately from the regular monthly salary and no standard deduction is allowed for PRC IIT calculation. Further, the taxable bonus or stock incentive income shall be evenly divided into six instalments and IIT shall be calculated on the divided amount by applying the applicable monthly tax rate during the relevant period. This method should only be allowed to be used once a year.

DLA Piper Comments

The above rules were published to address various PRC IIT issues of non-PRC-domiciled individuals working in the PRC and have brought significant changes to the PRC IIT positions especially for expatriates assuming regional roles and/or who are required to travel to the PRC from time to time. Companies should review the actual situations of their expatriate employees working in the PRC on a case by case basis, for instances, their PRC travel patterns, compensation structures, etc, so as to assess if any adjustments have to be made for their PRC IIT planning and reporting purpose.