How many times have you seen friends finish dinner and fight for the fapiao? Welcome to China’s byzantine tax system. Restaurant invoices are the most obvious element of a system that remains mysterious and difficult to understand even to many Shanghai lifers, but you need to know more than that.
We spoke with accounting consultancies and wealth management firms about the ins and outs of China’s Individual Income Tax system and summed it all up in 14 questions.
What is Individual Income Tax?
Individual Income Tax (IIT from here on out) is a tax imposed on the salaries of any individual residing or making money in China, starting at 3% and topping out at 45%. (Capital gains, interest, dividends and royalties, if you’ve been selling properties and such, are taxed at a flat rate of 20%). Residents of China are subject to IIT on their global income if they've been here consecutively for six years (see the 30-day rule below). Non-residents will be taxed only on their earnings in China.
How do I know if I’m a resident of China?
For tax purposes, you’re considered a resident in China if you spend at least 183 days of the year in the country. If your country does not have a double tax treaty with China, the threshold comes down to 90 days. A great many countries do have this treaty, so 183 days is the standard.
Who pays my income tax? Me or my employer?
You pay it. It just never makes it to you because it is deducted from your salary and then withheld by your employer every month on behalf of the tax authorities. Your company effectively serves as a “collecting agent” for them, which is the same as in many Western countries.
How much IIT am I paying?
There are a number of online resources that can help you quickly figure out how much IIT you should be paying. China Briefing has one here that lets you enter your expat deductibles and has an easy breakdown. S. J. Grand’s is simple and works well. See it here.
IIT rises progressively by month. It's confusing. See the chart below. It's better to talk about what you pay per year than per month. Using S. J. Grand’s calculator, assuming you’re a resident of Shanghai you'll be paying the following (excluding social insurance).
15,000 per month, you’d be paying around 7,600 annually (4.2%).
30,000 per month, you’d be paying around 36,900 annually (10.3%).
50,000 per month, you’d be paying around 99,800 annually (16.7%).
100,000 per month, you’d be paying around 317,100 annually (26.4%).
What is social insurance?
China’s Social Security system consists of a housing fund and five mandatory insurance schemes: pension, medical, work injury, unemployment and maternity. All companies are required to pay into them for all employees, including expatriates. The company and employee each contribute a certain amount. Those payments are the ones that can sometimes be claimed back when you leave China.
The key difference that separates social insurance from IIT is that social insurance will benefit the employee directly, while IIT is collected in order to be spent at the government’s discretion.
What items are deductible for expats? How would this affect my income?
Items eligible for special deduction from IIT fall into six categories: children’s education, continuing education expenses, healthcare costs for serious illness, housing mortgage interest, expenses for supporting the elderly and housing. The maximum amounts allotted for each deductible item varies; see more specifics here.
As Harm Hoonstra at MS Advisory points out, expats can claim other tax-free benefits like housing, meal and laundry subsidies, relocation costs, business travel, family visits (flights home), language training fees and children’s education fees. These expat-only extras will be abolished from 2022 onwards, but are currently still available as long as the individual hasn’t chosen to switch to only the six special itemized deductions.
I've heard expats have to file taxes on their own. Is this true?
Expats have to file monthly tax returns in China, but this is usually done by the employer on the employees’ behalf. Probably one of those thankless tasks that the person in your finance department is swamped with. Technically, expats are obliged to take care of their own annual tax filings. According to Peter Chan, managing partner at Stone Compass Associates, there are several circumstances in which they’ll be expected to do so:
If you make over 120,000rmb per year
If you receive income from two or more Chinese employers
If you receive income from outside China
If you receive income without a withholding agent (a company or person that controls your income)
S. J. Grand details how to do this right here. This can be done by a verified Alipay account (it's under the City Services tab) and WeChat (follow the Shanghaishuiwu official account). The process is currently online and pretty streamlined – much better than when it could only be done with paper filing – but all the interfaces are in Chinese, so you’ll need help if you can’t read the language.
Technically, this must be done every year by March 31 or you may face a fine starting at 2,000rmb and up.
Necessary information includes: name, ID type and number, profession, employer, place of residence, address in China, post code and telephone number, as well as tax data such as the annual amount of any different sourced incomes, taxes payable, taxes prepaid and withheld, foreign tax credit and taxes owed or overpaid. You’ll also have to declare your nationality and date of arrival in China.
I’m a freelancer; how do I make sure I handle the tax?
Short answer: start your own company.
Long answer: freelance income is subject to IIT, and the best way to do make sure you’re paying what you ought to be is to negotiate a situation in which your contractor pays the net amount of tax to the bureau for you, like a full-time employer, and gives you proof that tax has been paid. There shouldn’t be any need for the freelancer to provide their contractor with a fapiao for their services unless the taxes withheld and the monthly fee combined are higher than 100,000rmb.
However, in practice, you are likely to be asked for a fapiao. Most companies are not familiar with the legal requirements.
So what do you do?
If the other side refuses to pay the net amount of tax for you, you may need to DIY. That means going to the local tax bureau and asking them to issue a fapiao on their behalf based on their service contract. This does happen, and is effectively an administrative process that involves filling out lots of forms.
In reality, rules are tightening and freelancers are a diminishing group in Shanghai; most have made the transition to self-employment via registering a consulting company. This allows you an even greater degree of flexibility, but depends a lot on your medium to long-term intentions for doing business in China and the realistic view on how you are able to sustain such a business. Setting up your own company is its own article.
How do I see how much tax I’ve paid?
When the latest round of updated IIT laws came into effect in January 2019, they did so along with a new app called 个人所得税 (ge ren suodeshui) which allows individuals (including freelancers) to access information on salaries, wages and taxes paid. The app is only currently in Chinese and requires a decent amount of personal information; S.J. Grand has a detailed run through of how to get the app and how to get started with it. If you’re employed full-time, ask your HR for assistance with this process.
After paying taxes on my income, how do I legally take money out of China?
If it comes time to leave China and you want to take all that hard-earned cash out with you, you’re free to do so: as long as you can prove that you’ve paid all the appropriate taxes on it, you’re free to move it out of the country up to any amount you’d like. We've been over that before.
Difficulties are most likely to arise with individual banks, which will require a lot of documentation to prove that all your taxes are accounted for and all of that money you’re trying to move is above board. When you visit your bank to start the process, make sure you bring tax bills and payroll slips (which you’ll probably have to ask your employer for) as well as the standard work contract, passport and work permit.
Can I get back any of my tax when I leave China?
Unfortunately not. You may have heard about other people leaving China and claiming money back, but this is likely people getting a return on previous payments into the social insurance scheme. These payments can sometimes be refunded upon leaving China, depending on which city or province you’re based in, while IIT is never refundable.
I’ve heard about a “six-year rule” and a loophole that gets me out of paying more tax. What’s up with that?
If you’ve lived in China long enough, you’ve either seen a friend or colleague take a 30-day trip to avoid paying more IIT, or taken one yourself. And no, this isn’t tax evasion.
Any individual that has lived in China for six full 365-day years will be subject to IIT not only on their money made in China, but any income that they may make in other countries around the world. Fortunately, any extended absence of 30 consecutive days outside of China means that the year lived in the country has not been a full one, and the clock is “reset”. You return, and you have another six years before you’ll be required to pay IIT on your worldwide earnings.
It’s a great way to convince your boss that you literally need a month-long vacation. You’re also exempt from paying IIT on worldwide income if you reside in China for less than 183 days per year. Anyone that has no permanent domicile (or a place of residence that they stay in within China) but has been in China for an accumulated 183 days within a tax year will still be deemed as a tax resident.
This used to be a five-year rule, but the period was extended to six years in 2019. This means that every expat’s “clock” was automatically reset on 1st January 2019. No one is fulfilling the six-year rule until at least 2024.
What are fapiao, anyway?
Here’s the simplest definition we got, courtesy of Harm Hoonstra, Associate at MS Advisory: "A fapiao is a Chinese document used for registering generation of revenue and VAT. So, a receipt mentioning the services sold, to whom and at what VAT rate." So, it’s an official invoice, provided by the seller but issued by the Chinese Tax Bureau for any goods or services purchased within the country. The government uses these invoices to track tax payments and deter tax evasion. It basically fills dual roles as both a legal receipt and a tax invoice. On an individual level, they are often needed to reimburse business expenses, while companies use them to record transactions.
They are important to expats because of the itemized deductions of up to 30-35% of taxable income that they are allowed for things like children’s education and medical expenses; these expenses will require fapiao to be submitted in order to be claimed.
So why do my friends at restaurants fight over them?
Basically, according to Gauhar Tazhutova at St. James's Place, “a fapiao is the only valid evidence for an expense claim in China… THAT’S why people rely on it so much”.
There are a few other reasons, according once again to MS Advisory. One, some expats have meal subsidies in their contract, meaning their company may give a certain monthly allowance for meals which the employee would need a corresponding fapiao to claim. Likewise, people may be able to use restaurant fapiao to claim reimbursement for work related transactions, which can include taking business partners for lunch.
Finally, companies often need "replacement fapiao" for transactions that they cannot get fapiao for. Popular options for this are taxi or DiDi fapiao, as well as restaurant fapiao, though in this case the benefit of getting the fapiao is for a company, not the individual taking it themselves.
Given this, it’s very likely that many people you know need to provide fapiao for expenses or salary purposes on a semi-regular basis, which is why there is often a rush to dibs the fapiao for a big group meal. So now you know.
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