The new Personal Income Tax Law took effect on 1st January, 2019, which was followed by a set of rules laid down by relevant authorities, for example, the Regulations for the Implementation of the Personal Income Tax Law and the Temporary Rules on Special Expense Deductions Relating to Personal Income Tax. People involved should be prepared for the effect of such rules on individual tax payment obligations of foreign passport holders or people with permanent residence in foreign countries. I have been asked for advice on this several times. This article is intended to list and give brief answers to frequently asked questions by taking into account the above new rules and other laws and regulations now in effect. This article can only be used for your information.   

1.Will the new Personal Income Tax Law have the same effect on people with a foreign passport and ones only with residence in a foreign country. What can they do about their houses in China?  

Answer: According to the Personal Income Tax Law and other regulations recently published (collectively called “New PIT Regulations” below), people who have a foreign passport or the right to reside in a foreign country should pay personal income tax in China at the same rates. 

New PIT Regulations classify taxpayers into two groups: individuals who are resident in China and ones who are not resident in China. Individuals who are resident in China should pay to Chinese authority tax on money they earned in and outside China. Individuals who are not resident in China only need to pay to Chinese authority tax on money they earned in China.  

Whether a person is a tax resident in China is not related to his/her passport, right to be resident in a foreign country and house(s) in China and mainly depends on whether he/she lives in China habitually because of his/her registered permanent residence, family or financial connections or for accumulated 183 days a year (i.e. from 1st January to 31st December). People who meet the above conditions are tax residents in China and should pay tax on earnings from within and outside China. Further explanation is as follows.

a.A person who has a foreign passport or is permanent resident in a foreign country but has no house in China and lives in China habitually for the above reasons or for accumulated 183 days a year is a tax resident who should pay tax to Chinese authority on earnings from within and outside China excluding personal income tax on earnings from foreign countries that is already paid outside China.  

b.A person who has a foreign passport or is permanent resident in a foreign country and lives abroad, not living in China habitually or for accumulated 183 days a year is not a tax resident who does not need to pay tax on earnings from outside China, even if the person has a house in China.

c.A person who has a house in China and lives in China habitually or for accumulated 183 days a year is certainly a tax resident. 

d.A person who lives in China habitually because of his/her registered permanent residence, family or financial connections for less than accumulated 183 days a year is a tax resident. For example, if a person whose family lives in China and who normally lives in China as well often travels abroad for business reasons and has not lived in China for accumulated 183 days, the person should be deemed to live in China habitually.   

e.Both tax residents and non-tax residents will pay tax at the same rates on a house sold in China.

f.Based on the above, by law, whether a person has a house is not related to whether the person is a tax resident or not although having no house may be a small advantage in giving proof of living habitually. Further analysis needs to be made on a case-by-case basis. 

2.After the promulgation of the new policy, if a person keeps his/her inheritance in trust assets that have not been distributed, should the person pay personal income tax? What do tax policies relating to things given as gift say?   

Answer: Securitization related clauses suggest that investors in an organization should pay tax on distributed interests in a trust by law upon receipt of the same. Accordingly, no income tax is payable on inheritance kept in a trust as long as interests in the trust is not distributed. With respect to things given as gift:    

a.Neither tax residents nor non-tax residents in China need to pay tax on any property accepted as gift.

b.No tax is payable on assets given as gift and kept in a trust with other person designated as beneficiary of such assets as long as such assets are not distributed.

c.Personal income tax is payable on earnings from sale of assets given as gift (except cash), for example, shares in a house. 

d.Tax residents in China should pay to Chinese authority tax on assets given as gift and sold abroad. Non-tax residents in China do not need to pay to Chinese authority tax on earnings from sale in a foreign country of assets received abroad as gift.  

3.Exit tax related policy and how to avoid becoming a tax resident

Answer: The only provision relating to exit tax is that tax reporting and liquidation should be completed before expatriation.

How to avoid become a tax resident: with respect to people who live in China not habitually but for 183 days or more a year and: 

live abroad for more than 30 days at least once every six years;

have completed recordation formalities with the competent tax authority; and

have earnings from outside China paid by a foreign organization or individual 

If they meet all these conditions, they do not need to pay tax to Chinese authority on earnings from within China, which means they are not Chinese tax residents.

How can non-tax residents avoid paying personal income tax on earnings from within China: by living less than 90 days in China every year and being paid by a foreign employer. If they meet both these conditions, they don’t need to pay to Chinese authority personal income tax on earnings from within China. 

4.If the local public security department cancels a person’s registered residence upon presentation of his/her Residence Permit issued by a foreign department, can the person get back his/her registered residence and identity card when holding a valid Chinese passport? 

Answer: A person who has become a foreign citizen and is no longer a Chinese citizen needs to submit an application to and obtain approval of a Chinese public security department before becoming a Chinese citizen. The person will no longer be a foreign citizen once becoming a Chinese citizen. Waiving a registered residence in a place without having registered residence in any other city in China means waiving the status of being a Chinese citizen. Unless in special cases, the public security department will approve application for becoming a Chinese citizen again. 

In the current economic situation, as laws change frequently, there may be new laws and regulations that conflict with the above provisions or administrative actions that are in contrary to the above practices. We recommend you seek professional advice before making preparations and arrangements.