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chingiskhan

Wonder Wit

Joined: Apr 24, 2007
Posts: 3680
Location: Shanghai
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Posted: Feb 05, 2009 - 10:47 AM
Post subject: Five year tax exile

I rarely ask questions here but this is an important issue which must surely affect many expats here.

I have heard that all expats need to leave China for one whole month every 5th year otherwise they can be liable for tax on all their income and assets overseas.

I know many friends who have gone away for a month on their 5th year and I myself did the same but now I am coming up to another 5 years.

My question is : does anyone know EXACTLY what the implications are if I do not leave China and also, what are the exact terms for avoiding this? Someone told me it was 30 consecutive days outside mainland China (so HK or TW would be fine). Someone else said it must NOT be recorded as vacation by your company otherwise it doesn't count which seems odd.

Any light that can be shed is much appreciated. As usual in China everything is vague and nobody really knows what the deal is.

kumlong

PopStar

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Location: puxi
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Posted: Feb 05, 2009 - 10:54 AM

how would they know how much u earn overseas???

underh20
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Posted: Feb 05, 2009 - 10:57 AM

^ Exactly.

They wouldn't.

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joeljuls

Talker

Joined: Apr 29, 2008
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Posted: Feb 05, 2009 - 11:01 AM

i can ask my wife who is in HR and reply you tonight.

kumlong

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Posted: Feb 05, 2009 - 11:03 AM

of course if u ask the authorities they would give u an answer by the book, just as with everything in china. but if u think abt it, no one will be able to check.

chingiskhan

Wonder Wit

Joined: Apr 24, 2007
Posts: 3680
Location: Shanghai
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Posted: Feb 05, 2009 - 11:18 AM

I understand it would be difficult for them to find out, and so I guess what you guys are saying is don't worry about it. But that's not really what I am asking and I am sure many expats (including several HK friends) would not go to the bother of leaving for a month if it were not a real issue.

My HR I am sure know nothing about this, or will say they don't because they don't have much experience with expats, but I know there are people here who work with lots of other expats and must know the rule and its details.

chingiskhan

Wonder Wit

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Posted: Feb 05, 2009 - 11:19 AM

kumlong wrote:

of course if u ask the authorities they would give u an answer by the book, just as with everything in china. but if u think abt it, no one will be able to check.

I have the largest portion of my assets in Hang Seng Bank in HK. I am pretty sure if they wanted to they can access this account.

kumlong

PopStar

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Posted: Feb 05, 2009 - 11:42 AM

do u have a hk id?

underh20
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Posted: Feb 05, 2009 - 11:45 AM

chingiskhan wrote:

kumlong wrote:

of course if u ask the authorities they would give u an answer by the book, just as with everything in china. but if u think abt it, no one will be able to check.

I have the largest portion of my assets in Hang Seng Bank in HK. I am pretty sure if they wanted to they can access this account.

1.4 billion Chinese people and only less than a fraction of 1% are tax / police. You really think they are going to be spying on you?

Unless, of course, you are really a closet FLGer or DLama freak.

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shanghai_flava
Rocker
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Joined: July 19, 2008
Posts: 616
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Posted: Feb 05, 2009 - 11:59 AM

Exactly!
Just take it easy mate.

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mat

Shanghai Royalty

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Posted: Feb 05, 2009 - 12:17 PM

OK, here is the deal.

You must leave for 30 consecutive days in a calendar year every 5 years. (Eg, cannot include over Xmas and New Years)

OR

Leave for 90 total days non consecutive in any calendar year.

Implications if you don't, world wide tax. ie, tax is payable on all income earned outside of China.

yes, yes, how do they know... well, that is one thing, but i'd rather be on the right side of the law (very rare, yes!). I am doing my month hiatus in April/May this year.

Most problems would come with maybe HK income, but also, we have come up with a scenario that will definitely affect me and my partners.

We have a BVI company, and have just set up a WOFE in China, related to that BVI. We have transfer pricing between the BVI and our WOFE, keeping some of the money in the BVI (which buys from the supplier). That money we keep is our "income". The tax authorities here need to see why there is a transfer pricing difference between the BVI and our WOFE. Our explanation is Salary. Now, if we don't do the 30 day leave, we would definitely have to pay income on that, as we've had to tell the Chinese.

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dsugg
LoopKicker

Joined: Nov 18, 2007
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Posted: Feb 05, 2009 - 12:26 PM

or - they could assume you have overseas assets, impose an arbitrary figure and leave it to you to prove otherwise. Might be a .0001% chance but who knows how things will change when tax dollars dry up. Personally I thing they will start enforcing tax rules a lot tighter as they start running low on cash.

underh20
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Posted: Feb 05, 2009 - 02:29 PM

dsugg wrote:

Personally I thing they will start enforcing tax rules a lot tighter as they start running low on cash.

Already in the works. When the PSB and tax bureau systems are fully integrated, look for mandatory tax declarations from all expats and stricter enforcement.

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chingiskhan

Wonder Wit

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Posted: Feb 05, 2009 - 03:34 PM

mat wrote:

Mat, thank you. Someone who knows what I am talking about! I'm not a stickler for following the rules, but I also know many of my friends would not bother if it weren't important. As you say, how do they know isn't really what I was asking, that's a totally different issue, so this is helpful.

dys

Barker

Joined: Feb 14, 2007
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Posted: Feb 05, 2009 - 03:36 PM

Quote:

You must leave for 30 consecutive days in a calendar year every 5 years. (Eg, cannot include over Xmas and New Years)

OR

Leave for 90 total days non consecutive in any calendar year.

I am no expert when it comes to Chinese personal income tax, but am not entirely sure this is correct. The main legislation in relation to this area is in Caishuizi (1995) 98 which says that:

"If, in any year commencing from the sixth year, a taxpayer lives in China for less than 90 days (or less than 183 days if a tax treaty applies), the 5 year period will be recalculated to commence from the year in which he or she once again lives within China for one full year".

So seems to be pretty clear to me - only way to break the 5 year period is remain outside of China for less than 90 days - possibly 183 days if a treaty applies.

I think the only effect of staying out of China for either 90 days non-conseq or 30 days conseq is that you're deemed to have not spent a full tax year in China. Thus, obviously if you spend a full tax year in China the following year, tax on worldwide income would kick in.

Quote:

how would they know how much u earn overseas???

Agree that it may be difficult for the Chinese tax authorities to know your offshore income at the moment, but expect this to change in the future. There is a growing trend for greater mutual co-operation between tax authorities in disclosing information to each other.

Quote:

We have a BVI company, and have just set up a WOFE in China, related to that BVI. We have transfer pricing between the BVI and our WOFE, keeping some of the money in the BVI (which buys from the supplier). That money we keep is our "income".

Sounds like transfer pricing is the least of your worries to be honest mate. If the tax authority you're dealing with had any sense they'd start to enqure where the effective management of the BVI company is. If it is in China - because most of the directors are located in China - then they could easily argue, under the current law, that its resident in China and should be subject to Chinese corporate tax. However, don't get me wrong. I'm not for a minute saying your BVI company falls foul of law, I'm just saying this is an often line of argument the tax authorities take here if they're sophisticated enough.

chingiskhan

Wonder Wit

Joined: Apr 24, 2007
Posts: 3680
Location: Shanghai
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Posted: Feb 05, 2009 - 03:37 PM

kumlong wrote:

do u have a hk id?

Yes. Permanent HK ID card and that's what is used for my bank account. I am British born and raised but one of my parents was born in HK and under current rules, I was able to get a HK ID card after proving she was my mother.

underh20
Board Legend

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Posted: Feb 05, 2009 - 03:39 PM

kumlong wrote:

do u have a hk id?

What's the relationship between having a HK ID card and opening / maintaining a bank account in HK?

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chingiskhan

Wonder Wit

Joined: Apr 24, 2007
Posts: 3680
Location: Shanghai
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Posted: Feb 05, 2009 - 03:46 PM

I am guessing Kumlong is implying if you have a HK ID the bank will be less willing to "protect" your financial data if the government comes asking for them compared to if you're a foreign national.

ggh

PopStar

Joined: May 13, 2006
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Posted: Feb 05, 2009 - 03:50 PM

So if you do not have any income from out of china, you don't even need to worry about leaving the country every 5 yrs. because there will be nothing else to tax you other than your china income.

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dys

Barker

Joined: Feb 14, 2007
Posts: 142

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Posted: Feb 05, 2009 - 03:57 PM

Quote:

So if you do not have any income from out of china, you don't even need to worry about leaving the country every 5 yrs. because there will be nothing else to tax you other than your china income.

Yeah, but what a lot of people do is arrange to be paid into an offshore bank account - normally HK - which they dont declare to the Chinese tax authorities even if it relates to an employment carried out in China - completely illegal I may add.

hammerforlife
Low Seater

Joined: May 24, 2004
Posts: 3303

Posted: Feb 05, 2009 - 04:03 PM

dys wrote:

"If, in any year commencing from the sixth year, a taxpayer lives in China for less than 90 days (or less than 183 days if a tax treaty applies), the 5 year period will be recalculated to commence from the year in which he or she once again lives within China for one full year".

The way that is written is very different to what others have said. That says that you must be outside of China for 9 months in the year, not for 90 days.

dys

Barker

Joined: Feb 14, 2007
Posts: 142

Status: Offline

Posted: Feb 05, 2009 - 04:08 PM

Quote:

dys wrote:
"If, in any year commencing from the sixth year, a taxpayer lives in China for less than 90 days (or less than 183 days if a tax treaty applies), the 5 year period will be recalculated to commence from the year in which he or she once again lives within China for one full year".

The way that is written is very different to what others have said. That says that you must be outside of China for 9 months in the year, not for 90 days.

Which is precisely what I am saying.

hammerforlife
Low Seater

Joined: May 24, 2004
Posts: 3303

Posted: Feb 05, 2009 - 04:15 PM

dys wrote:

Which is precisely what I am saying.

Really? You sure about that? Wink

dys wrote:

So seems to be pretty clear to me - only way to break the 5 year period is remain outside of China for less than 90 days - possibly 183 days if a treaty applies.

Perhaps you mean inside?