Doing your tax in China doesn’t have to be hard.
It’s estimated that more than 70,000 Americans are currently working in China. It’s simple to see why this is the case – China has been growing at an extraordinary rate over the past 20 years.
This means opportunity and possibly a big pay check for experienced expats.
But when it comes to expat taxes in China, things aren’t so sweet.
China has one of the most complicated tax systems in the world, and you could end up doing the wrong thing without even knowing.
That’s why today I’m going to share my simple guide to US expat tax in China. Hopefully you’ll learn a thing or two!
Compliance is essential
Before we jump into the detail, it’s important to know about compliance.
When you start working in China, you need to make sure you’re compliant with China’s tax rules.
Each person is responsible for their own taxes, and fines and passport suspensions may be imposed if things aren’t done properly. Trust me, the last thing you want is a knock at the door from the Chinese tax authorities!
When starting or signing contracts in China for the first time, there are three things you must remember to do:
- Get a work visa
- Get a residence permit
- Register for taxes.
Your employer should be able to help you with this.
If your employer invites you to work in China on a non-work visa, like a tourist visa, this is a red flag so be careful.
When the time comes that you’ve finished working in China, you’ll have to settle with the Chinese authorities over your earnings.
The immigration authorities and the tax agency share information such as immigration records, visa types, and length of stay.
So, if you’re going to work in China legally – as I’m sure you will be – there’s no escaping paying your fair share of taxes.
Do Americans living in China pay taxes?
The short answer is yes.
Paying tax in the US
If you’re a US citizen or permanent resident, you’re required to submit US taxes with the IRS every year, regardless of where you live.
In addition to your ordinary income tax return, you may be required to complete what’s known as the FinCEN 114 Form.
This form basically captures information about any assets you have in China, such as money in Chinese bank accounts.
The form must be filed on Tax Day, April 15, but you can request an extension until October 15.
If you don’t report the funds you have in China, or you’re not keeping proper records, you may fall foul of the law. There are hefty financial penalties, which you can see here.
Paying tax in China
When you’re living and working in China, you may also need to pay tax to the Chinese authorities.
For example, if you’ve been working for a foreign company in China for at least 183 days in a calendar year, you must pay income tax in China.
What’s the China tax rate?
In China, income tax rates for foreigners for 2021 are as follows:
|Annual taxable income (RMB)||Tax rate (%)|
|0 to 3,000||3|
|Over 3,000 to 12,000||10|
|Over 12,000 to 25,000||20|
|Over 25,000 to 35,000||25|
|Over 35,000 to 55,000||30|
|Over 55,000 to 80,000||35|
As you can see, the tax rate progressively increases until it’s capped at 45%.
Your company should automatically deduct taxes from your pay check on a monthly basis.
You don’t need to worry too much about tax rates unless you get a promotion or change jobs in China, because this could mean you’re bumped into a higher tax bracket.
If you have any stocks or investments in China, you’ll need to consult with an American tax professional who is well-versed with Chinese tax regulations. This is because there are complicated rules governing taxation of foreigners.
Some income tax deductions are allowed but you’ll need to submit the necessary documents to the IRS.
You’ll also need to file registration paperwork if you want to take advantage of the US-China expat tax treaty benefits, as mentioned below.
Can US expats enjoy a China tax deduction?
The United States is one of the few countries that taxes the worldwide income of its citizens and permanent residents who live abroad.
That sucks, right? Well, yes and no.
There are a number of legal ways American can be shielded from double taxation in China, such as:
- The foreign earned income exclusion means you can reduce your taxable income on US expat taxes by the first $108,700 earned in China in 2021 (or $107,600 in 2020)
- Foreign tax credit allows you to offset your taxes in China dollar-for-dollar with your US expat taxes
- The foreign housing exclusion allows you to deduct some household expenses incurred as a result of living overseas.
Important changes to US expat tax in China
From January 1, 2022, three major allowances for expats in China will no longer be exempt from China’s individual income tax (IIT):
- Educational costs for children
- Self-education like learning Mandarin.
This means you’ll receive a much lower net salary (since the allowances will effectively become part of your salary and won’t be separated any longer) or the company’s cost of employing you will nearly double (given that a 45% IIT will likely apply to the overall salary package).
Who can be considered a resident of China?
China has one of the most intricate residence status regimes in the world for foreigners.
For tax reasons, if you’re American and you spend the entire tax year in China, you’re regarded as a resident.
Residents are generally subject to China’s IIT on their worldwide income.
This means if you receive income from other sources like a rental property or dividends from shares, you have to declare that.
That’s why it’s important you visit the China Tax Office in person, register, and obtain a tax ID as soon as you’re eligible for Chinese taxation. Again, your employer can help you with this.
However, if you spend more than 30 days in a row (or more than 90 days in a calendar year) outside of mainland China, you forfeit your resident status that year.
Non-residents are generally taxed in China on their China-source income only.
There are pros and cons of being a resident vs a non-resident for tax purposes, and a tax professional can help with that.
What’s the US-China tax treaty?
Essentially, it’s a system that helps prevent double taxation for expats who file both Chinese and US taxes. For example, the treaty allows you to claim Chinese tax credits against taxes you’ve paid in the US.
The treaty has been around since the 1980s and helps keep things fair for both Chinese expats in the US and US expats in China.
If you want to take advantage of any of the treaty’s benefits, you’ll need to register with China’s tax authorities.
That’s one of the reasons why being compliant in China, as I mentioned above, is super-important.
Due date for filing income tax in China
China follows the same fiscal year as the United States, i.e. January 1 to December 31. However, the deadline for tax returns is not the same.
Chinese taxes must be filed with the China Tax Office between March 1 and June 30 of the following year, unlike in the United States.
And, China does not provide extensions to any taxpayers and imposes penalties for late filings.
It’s also important to note that you must file your Chinese tax return before you file your US expat tax return.
Getting professional help is key
US expat tax in China is a complex topic, and I’ve only just scratched the surface.
However, I hope I’ve helped you understand a bit more about the main things you need to look out for.
As with any overseas tax matters, you should consult a professional like TFX if you need help.
Filing tax returns in multiple countries is something you don’t want to do alone!
This is a sponsored post courtesy of TFX. Main image credit: Image by Karolina Grabowska on Pexels.