China: Individual Income Tax Liabilities for Senior Personnel

The individual income tax (IIT) liability of employees holding a director or senior management position (including general and deputy managers, supervisors, persons occupying functional chief positions, and other persons occupying similar management level positions, collectively “senior personnel”) in China is dependent on a few factors, namely:
 
Where the employer pays;
The period in which the senior personnel is in China; and
Where the income is derived.
 
Income Paid by the Employer in China
 
For income paid entirely by the employer in China, regardless of whether the income is derived in China or overseas and the period in which the senior personnel is in China, the senior personnel is liable for IIT for the entire duration of time that they hold a senior personnel position.
 
Income Paid by the Employer Overseas
 
For income paid by the employer overseas, IIT liability depends on the period in which the senior personnel is in China and on whether the income is derived from China or overseas.
 
<90/183 Days
Where the company senior personnel has been in China no more than 90 days (or 183 days if a treaty is signed) cumulatively or consecutively in a year, such income is exempt from IIT.
 
>90/183 Days but ≤5 Years
Where the senior personnel has been in China for more than 90/183 days consecutively or cumulatively but no more than five years, his/her income derived from China and paid by employer overseas is also subject to IIT. 
 
>5 Years
Where the senior personnel has been in China for more than five years, and is in China for one full year in the sixth year, he/she will be subject to IIT on his/her global income.
 
Income Paid by the Employer in China and Overseas
 
For income paid partially by the employer in China and partially by the employer overseas, and where the senior personnel spends a certain number of days working abroad in a month, the portion of income paid by the employer overseas will be exempt from IIT for the number of days the senior personnel works overseas. (Please see box below for formula). In addition, a few countries have clauses in their double tax agreement with China where the rules may differ slightly.
 
Tax Liability for Chief Representatives of ROs
 
In general, chief representatives can be divided into full-time and part-time chief representatives.
 
A full-time chief representative needs to pay tax on his/her whole salary package on a monthly basis, without time apportionment. A part-time chief representative’s IIT is calculated based on the total salary received from both the China entity and the headquarters. The tax is time-apportioned, i.e. the income from time spent overseas is exempted from tax and the chief representative only needs to pay IIT for the time he/she spends in China. To pay tax as a part-time chief representative, the employment contract must specify that the position is part-time.
 
For income paid partially by employers in China and partially by employers overseas, where the senior personnel spends a certain number of days working overseas in a month, the formula for calculating the monthly tax payable is as follows:

Monthly Tax Payable =   [(Salary III - 4800)* tax rate - QD]] * (1 - Salary II / Salary III * Day II / Day III)
 
Salary II  =  Income paid by employer overseas

Salary III = Income paid by employer in China + income paid by employer overseas
 
Salary II  =  Income paid by employer overseas

Salary III = Income paid by employer in China + income paid by employer overseas
 
 
Dezan Shira & Associates is a specialist foreign direct investment practice, providing business advisory, tax, accounting, payroll and due diligence services to multinationals investing in China, Hong Kong, India, Singapore, and Vietnam. Established in 1992, the firm is a leading regional practice in Asia with twenty offices in five jurisdictions, employing over 180 business advisory and tax professionals. For professional advice on doing business in China, please contact Dezan Shira & Associates at info@dezshira.com or visit www.dezshira.com.