Relevant provisions and planning of individual income taxes for Board Directors and Executives
1. Connotation for Senior Executives.
It is quite clear about connotation of Board Directors on practice, namely Board Directors is referred to the members of Board of Directors, which participates in major decision-making, also implements and supervises those strategies. In particular, there are different definitions for senior management staff. Regarding definition and scope of “senior management staff”, Guo Shui Han [1995] No 125 indicates senior management positions of companies in China as principal, deputy (general) managers, with functions of chief expert, commissioner and other similar management and supervisor duties.
2. Guo Shui Han [2007] regulation No 946
According to the document of regulations (Guo Shui Han [2007] N946) 《State Administration of Taxation approval of personal income tax calculation formula for non-residence Board members and Senior management positions internal holders》non-residence individuals on Board member or Senior management positions in China (hereinafter senior management ), at the same time working on part-time position in China and abroad, entire monthly remuneration collected inside or outside of China reasonably cannot belong to domestic or abroad remuneration for work, should be distinguished according to the following formulas for individual income tax payable calculation.
1. Non Tax Agreement (CEPA) applicable for senior management with less than 90 days of continuously or accumulative period of residence in China of annual taxable period or based on Tax Agreement (CEPA) regulations should be identified as the fiscal resident of the other agreement party, however applicable for the Board members fees for corporate senior management in China of Tax Agreement (CEPA) regulations, with less than 183 days of continuous or accumulative period of residence in China, the following formula for calculation is applicable:
Tax payable = (monthly taxable incomes paid inside and outside × Applicable tax rate - quick deduction) × monthly incomes paid inside ÷monthly incomes paid inside and outside
2. Non Tax Agreement (CEPA) applies or based on Tax Agreement (CEPA) regulations should be identified as the fiscal resident of China for senior management , with continuous or accumulative period of residence in China for more than 90 days, but according to 《Notification on calculation issues for non residence individuals living in China for 5 years by State Administration of Taxation, Ministry of Finance》(Cai Shui Zi [1995] N 98) relevant regulations, for less than 5 years of continuous residence in China applies the following formula:
Tax payable = (monthly taxable incomes paid inside and outside × Applicable tax rate - quick deduction) × [1 - (monthly incomes paid outside ÷monthly incomes paid inside and outside) × (number of days abroad at that month ÷ days in the month)]
3. According to provisions of Tax Agreement (CEPA) should be identified as the fiscal residents of the other agreement party for senior management, however applicable for the Board member fees for corporate senior management in China of Tax Agreement regulation for more than 183 days of continuous or accumulative period of residence in China, the following formula for calculation is applicable:
Tax payable = (monthly taxable incomes paid inside and outside × Applicable tax rate - quick deduction) × [1 - (monthly incomes paid outside ÷monthly incomes paid inside and outside) × (number of days abroad at that month ÷ days in the month)]
4. Non Tax Agreement (CEPA) applies or based on Tax Agreement (CEPA) regulations should be identified as the fiscal resident of China for senior management, according to Cai Shui Zi [1995] N 098 and relevant constitute provisions, if have been resident continuously in China for 5 taxable years and still re-reside in China for one year, should calculate individual income tax based on wages and salaries according to the following formula:
Tax payable = monthly taxable incomes paid inside and outside × Applicable tax rate - quick deduction
No matter whether it is applicable or not for Tax Agreement, based on Cai Shui Zi [1995] N 098 and relevant constitute provisions, if individual has been resident continuously in China for 5 taxable years and still re-reside in China for one year, overall taxation obligations should be performed, i.e. income tax declaration for total amount of inside and outside incomes should be applied in China. Therefore, for better understanding of those formulas, we prepared two examples below:
Example 1
Mr. X is a Hong Kong resident, working in Hong Kong A Company. Hong Kong A Company established B Company in Mainland China where Mr. X is at the same time holds position of CEO. Total amount of working period in Mainland China in 2011 is 150 day, with monthly salary received from Hong Kong A Company 20,160 RMB and 8,000 RMB received from Chinese B Company. The number of days spent in Mainland China in September is 7 day. Let’s calculate individual income tax to be paid in China by Mr. X
Answer: According to Chinese and Hong Kong regulations of Tax Agreement (CEPA), Mr. X’s residence in Mainland China in 2011 is approximately 150 days, which are less than 183 days; therefore individual income tax should be calculated by the following formula:
Tax payable = (monthly taxable incomes paid inside and outside × Applicable tax rate - quick deduction) × monthly incomes paid inside ÷monthly incomes paid inside and outside
=[（20160+8000-4800）×25%-1005]×8000/（20160+8000）= 1373.58 RMB。
Example 2
Mr. Y is a foreign resident working in foreign invested company in China as finance supervisor and Board director. At the same time he holds position in Head Quarter of this company abroad, having Tax Agreement (CEPA) between that country and China. In 2011 working period in China is 200 days with monthly salary received 80,000 RMB where 30,000 RMB is paid by foreign invested company in China and the other 50,000 RMB is paid by foreign HQ. In September Mister Y spent 20 days in China, how much of individual income tax should be paid in September?
Answer: Due to regulations of Tax Agreement between foreign countries and China, moreover period of days that has been spent in China by Mr. Y exceeds 183 days, then individual income tax should be calculated by the following formula:
Tax payable = (monthly taxable incomes paid inside and outside × Applicable tax rate - quick deduction) × [1 - (monthly incomes paid outside ÷monthly incomes paid inside and outside) × (number of days abroad at that month ÷ days in the month)]
=[（50000+30000-4800）×35%-6375]×（1-50000/80000×10/30）=15789.79 RMB
3. Current tax-free incomes for expatriates
Based on regulation《Notification regarding individual income tax certain policies issues by State Administration of Taxation, Ministry of Finance》it is temporary exempted from individual income tax for the following incomes:
(1) Obtained by foreign individuals in non-cash form or on an actual reimbursement basis for housing allowance, food allowance, relocation expenses or laundry expenses.
(2) Obtained by foreign individuals domestic and abroad business trips allowance
(3) Obtained by foreign individuals leave allowance, language training expenses, expenses for children education etc. and other rational parts examined and approved by local tax authorities.
(4) Obtained by foreign individuals dividend income from foreign invested company B-shares or overseas shares, dividend income (dividends).
(5) Foreign professionals who meet the requirements below exempt from individual income tax on obtained salary and wages income:
①Based on World Bank special loan agreement, foreign experts directly dispatched to work in China.
②Experts directly dispatched to work in China by United Nations
③Experts of the United Nations arrived to assist in project with China
④Experts dispatched by assisting country in China to assist in particular project.
⑤ Based on culture exchange projects signed between the government of two countries, the other country is responsible for salary and wages income of arrived to work in China for within 2 years experts in culture education.
⑥ Based on Chinese High School international exchange projects, other country is responsible for salary and wages income of arrived to work in China for within 2 years experts in cultural education.
⑦Experts arrived to work in China through non-governmental research protocol, and then government authorities of its country are in charge of salary and wages income.
(6) Individuals who received an award due to assistance in investigation of different kinds of illegal or criminal activity.
(7) Individuals withholding payment formalities, made deduction of fees according to regulations.
(8) Individual transfer for personal use for more than 5 years, moreover obtained income is only used for a family living housing.
(9) For individuals who reached retirement, retirement age, but due to operational requirements prolong extension of retirees for senior experts (refers to experts, scholars to enjoy special allowance from the government), their salary income as long as retired wages in extension of retirees period are not taxable for individual income tax.
(10) Individuals who purchased welfare lottery ticket, sports lottery ticket and won a prize in amount less than 10,000 RMB (included) are temporary exempted from individual income tax, if it’s more that 10,000 RMB individual income taxes should be levied.
(11) China blood related retired foreign intellectuals arrived to settle in China and appointed on position of technology adviser, each month income of issued allowance exempt individual income taxation.
4. Planning of individual income tax for foreign Board members and executives.
(1) Legitimate control of working and living time in China.
According to Guo Shui Fa [1994] No. 148 cultural policies and regulations, we can sort out the following meanings:
1. Non Chinese residence individuals who hold Board member or senior executive positions in Chinese company, at the same time hold part-time position abroad, no matter how long is the period for foreigner to stay in China, obtained salary and wages income paid in China [Regardless of income derived from the sources inside of China or not] are applicablefor individual income taxes.
2. Non Chinese residence individuals who hold Board member or senior executive positions in Chinese company, at the same time hold part-time position abroad, should define the following method of taxation for obtained salary and wages income inside and outside China based on Shui Fa [1994] No. 148 second clause, third clause, fourth clause provisions for tax payment obligations, i.e.:
（1） An individual within one taxable year residing in China continuous or accumulative less than 90 days or those from Tax-Agreement countries residing in China continuous or accumulative less than 183 days needn’t pay individual income tax on their incomes paid and derived from employers outside of China.
（2） An individual within one taxable year residing in China continuous or accumulative more than 90 days or those from Tax-Agreement countries residing in China continuous or accumulative more than 183 days but less than one yearshall pay his individual income tax on his income paid by employers both inside and outside of China during his service in China.
（3） If an individual within one taxable year resides in China for one year, the taxable method for his income paid outside of China is as same as (2) i.e. he shall pay his individual income tax on his income paid by employers outside of China during his service in China. Only if an individual resides in China for 5 years, he shall pay his individual income tax on income derived from sources both inside and outside of China started from the 6th year.
Defined by the table below:
|
|
|
Paid in China and source in China |
Paid in abroad and source in China |
Paid in China and source in abroad |
Paid in abroad and source in abroad |
|
Less than 90 day or 183 days |
General employee |
Levied |
Not levied |
Not levied |
Not levied |
|
Senior executive management |
Levied |
Not levied |
Levied |
Not levied |
|
|
More than 90 days or 183 days but less than one year |
General employee |
Levied |
Levied |
Not levied |
Not levied |
|
Senior executive management |
Levied |
Levied |
Levied |
Not levied |
|
|
At least 1 year but less than 5 years |
All employees |
Levied |
Levied |
Levied |
Not levied |
|
More than 5 years |
All employees |
Levied |
Levied |
Levied |
Levied |
It can be seen from the provision above that degree of taxation obligation for non-Chinese residence expatriates depends on the residence period duration in the territory of China. Expatriates resident in China for more than 5 years, from 1 to 5 years, 90 days (or 183 days) less than 1 year, less than 90 days (or 183 days) — According to these 4 different criterions, government exempt expatriates from part of tax obligations and their tax burdens are rather different. Therefore, expatriates should well control and appropriate arrange their duration of residence to lighten tax burden.
For long-term residence in China, expatriates should avoid continuous residence in China for 5 years. During the period of continuous resident in China for 5 years, once for more than 30 days or multiple times with accumulative 90 days period leave should be arranged, then this operation can be used to exempt from individual income tax on wages and salaries paid from abroad, property transfer, rent income and other income from abroad. If it is required for expatriate continuous resident in China for more than 5 years, it also should be randomly arranged (better in the last firth year) to leave for 30 days at once or accumulatively 90 days to terminate 5 years period, so that starting from that year and following 5 years of continuous residence in China only individual income tax on salary in China will be paid.
As for short term period of residence in China, it is better to control the period in China less than 90 days (or 183 days), to get tax exemption from incomes paid from abroad during his service in China.
(2) Take advantage of Tax Agreement (CEPA)
Tax Agreement (CEPA) is target to avoid double taxation, based on tax law taxpayers with the income received from abroad are allowed to deduct the amount of already paid individual income taxes abroad from the taxes to be paid in China. Taxpayers can take advantage from Tax Agreement (CEPA) to avoid double taxation but pay attention that legal valid levied income tax certificate from foreign country should be provided.
(3) Take full advantage of existing variety of tax incentives, reduce nominal wages
Based on Chinese tax law that housing payment, food and other allowances paid by cash form should all be calculated into the salary of the month and levy individual income tax, but for expatriates non-cash form or on an actual reimbursement basis of different allowances can enjoy exemption from income tax.
According to related regulations for expatriates receiving in non-cash form or on an actual reimbursement basis for housing allowance, food allowance, removal expenses, laundry expenses, domestic business trips allowance, leave fees, language training fees, expenses for children’s education are exempted from individual income taxes. Based on 《Notification regarding insurance fees relevant matters inside and abroad for employees in foreign invested enterprises or foreign enterprises》 (Guo Shui Fa (1998) No 101), although it is paid by enterprises, still, according to relevant country’s regulations it belongs to nature of employer burden to pay social securities and does not count as personal taxable income amount. Therefore, according to expatriate’s actual situation, company can adjust the payment amount of salaries and wages by reducing of nominated wages amount accordingly, thereby reducing individual income tax and increasing actual income. If personal salary in cash can be transferred into non-cash form or on an actual reimbursement basis for mentioned above allowances, then personal income tax can be reduced thereby increasing personal income after taxation.
(4) Change categories of taxation
Currently China adopt Classified Income Tax system, where personal income is divided into wages, salary income, personal service remuneration income, royalty fee income, income from interest dividends and bonuses, property rent income and others totally 11 items, which adopt different fees deduction provisions, different tax rates and different tax methods on individual income tax calculation. Obviously, with equal amount of income, the calculation of personal income tax to be paid vary from category of taxation used, even vary widely, which provide expatriates space in tax planning.
Therefore, on rather high salaries, the practical application of the tax rate in more than 25 percent of expatriates, when conditions permit, enterprises could transfer part of wages and salary income of these expatriates into income from personal service remuneration (typically applies a rate of 20%), royalties income (the practical application of the 14% tax rate), interest (for 20% tax rate) etc. The personal income tax burden will be reduced by degrading the applicable tax rates and increasing the deductible part.
For instance, in accordance with Guo Shui Fa [1994] No. 89 regulation document, for holding position of Board member with obtained director fees belong to the category of income from remuneration, parts of expatriates can be appointed on Board members positions and shift parts of their salary to Board member allowance by guaranteeing constancy of annual income, thereby shift these incomes from the category of salary into category of remuneration income.
(5) Rational wage structure arrangement, change of wage payment method.
China currently uses the progressive rating system for salaries and wages, so the more monthly salary of expatriates is paid, the more of individual income tax should be paid. The overtime allowance, quarterly bonus, 6-month bonus and other different bonuses paid by company, according to the 《Notification regarding bonuses taxation relevant matters obtained by resident in China individuals》(Guo Shui Fa (1996) No 206) should be added with salary of the current month for individual income tax calculation.
However, according to 《Notification regarding obtained annual bonus calculation method to levy individual income tax》 (Guo Shui Fa (205)No 9), one-time annual bonus obtained by individuals could be take as salary or wages of 13th month for income tax calculation solely. In calculation process the annual bonus should be divided into 12 month to determine the tax rate and quick deduction according to its quotient. It is easily to find that providing certain amount of one-time bonus, tax rates applicable for expatriate’s salaries can be degraded. As a result, when it comes to monthly salary for Senior expatriates, company can take certain amount of salary as annual bonus and pay it in the end of the year to degrade rates of individual income taxes so that achieve the purpose of reducing individual income tax.
It needs to be pointed out that as issues of individual income tax would involve very complicated situations such as determination of taxpayer ID, determination of revenue origin, deduction of tax payments, context of taxation agreement and other relevant certificates, taxpayers should be precisely cautious.