As a major manufacturing hub, China is where many Americans find themselves relocating to for work purposes. With the incredible rate of growth in the last 25+ years, it is easy to see why people are investing their time and money in China. However, China also has one of the most complex tax structures for expatriates. It is important to understand US tax for expats both in China and in the US.
US Tax for Expats in China
If you are a citizen or permanent resident of the United States, then you are obligated to file US taxes with the IRS each year, no matter where you live. In addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with the FBAR FinCEN 114 Form (which must be filed on Tax Day, April 15th). However, you can request an extension until October 15th.
How Americans in China Can Save on US Taxes
While the US taxes the international income of its citizens and permanent residents who reside overseas, it has special provisions to help protect them from double taxation, including:
- The Foreign Earned Income Exclusion, which allows you to decrease your 2019 taxable income by the first $105,900 earned as a result of your labor while a resident of a foreign country (and $107,600 on your 2020 taxable income),
- A foreign tax credit that could allow you to lower your tax bill on your remaining income by certain amounts paid to a foreign government, and
- A Foreign Housing Exclusion that allows an additional exclusion from income for certain amounts paid for household expenses that occur as a consequence of living abroad.
With proper planning and quality tax preparation, you should be able to take advantage of these and other strategies to minimize or even eliminate your US tax for expats. Please note that even if you do not believe you will owe any US income taxes, you will more than likely still be required to file a return.
Who Is a Resident of China?
China has one of the most complicated residence status systems in the world for foreign nationals and generally will require reviewing multiple taxation agreements with the US. Normally, a non-People’s Republic of China (PRC) national who resides in China for an entire tax year is considered a resident for tax purposes. If you spend more than 30 consecutive days or more than 90 cumulative days outside of mainland China in any given calendar year, you will lose your resident status for that year.
As a foreign national, you are required to register with the State Administration of Taxation (SAT) as soon as you are eligible for taxation in China.
After being a resident for five years, you will be subject to tax on your worldwide income.
Chinese Income Tax Rates
Income from employment is taxed monthly at a progressive tax rate that caps at 45%.
The tax rates from China’s State Administration of Taxation (SAT) for residents in 2019 are as follows:
|Annual Taxable Income in RMB||Rate Applicable to Income Level (%)|
|0 – 36,000||3%|
|36,000 – 144,000||10%|
|144,000 – 300,000||20%|
|300,000 – 420,000||25%|
|420,000 – 660,000||30%|
|660,000 – 960,000||35%|
|960,000 and above||45%|
For non-residents, the tax rates for 2019 are as follows:
|Annual Taxable Income in RMB||Rate Applicable to Income Level (%)|
|0 – 3,000||3%|
|3,000 – 12,000||10%|
|12,000 – 25,000||20%|
|25,000 – 35,000||25%|
|35,000 – 55,000||30%|
|55,000 – 80,000||35%|
|80,000 and above||45%|
Note that there is a monthly standard deduction for foreign nationals of RMB 5,000.
Your employer should withhold taxes on a monthly basis. For income on stocks or investments, you will need to get in touch with a Chinese tax expert, as there are complex rules regarding taxation of foreign nationals.
Some deductions to income are allowable, but you will need to submit relevant documents to the tax authorities for registration. You will also need to submit registration papers to enjoy any benefits of the US-China tax treaty on your US tax for expats.
US-China Tax Treaty
The US and China have a tax treaty in place, which is helpful when determining which country should be paid specific taxes and at what point those taxes should be paid. The US-China tax treaty is an expat’s guide to ensuring the taxes are paid to the right country. Note: you need to register with the tax authorities of China to take advantage of any of the benefits of the treaty. If you are unsure of the language in the treaty or have any other questions, be sure to talk to a tax advisor to ensure the correct taxes are paid to the correct country.
Chinese Tax Due Date
Being aware of the tax due dates in China is important because they are different than the US deadlines. For example, you will need to file your Chinese tax return before you file your US tax for expats.
The tax year in China is the same as the United States: January 1st through December 31st. Unlike the US, Chinese taxes must be filed with the State Administration of Taxation between March 1st and June 30th the following year. China does not offer extensions for any taxpayers and does apply penalties in the event of a late filing.
Your employer will be required to pay taxes for you on a monthly basis. You are also required to file a return if you meet the following criteria:
- Have more than one Chinese employer
- Have income earned in China from which taxes were not withheld
- Have an annual income of RMB 120,000 or more
If a taxpayer is not domiciled in China, they are exempt from filing Chinese tax returns if they were not in China for the entire tax year.
Social Security in China
China requires foreign nationals to participate in the country’s social insurance system. Because the US does not have a Social Security agreement with China, this is one area where US tax for expats may be doubled.
Is Foreign Income Taxed Within China?
While Chinese nationals are taxed on their foreign earned income, foreign nationals are only taxed on their income earned from a Chinese source. That said, if a taxpayer has been a resident in China for more than five years, they will be required to pay taxes on their worldwide income.
Other Taxes in China
In addition to income tax on salaries paid, there are other forms of income that are taxed in China.
There is a standard value added tax (VAT) rate of 16% on consumer goods, with a reduced rate of 10% applying to certain items, such as food, books, and utilities. Exports are generally tax exempt.
Chinese-sourced investment income (including royalties, incidental income, author’s remuneration, rental income, interest and dividend income as well as capital gains) is taxed at a flat rate of 20%. If you have been a resident of China for more than five years, you will also be taxed on investment income and capital gains sourced outside of China.
There is no inheritance, estate, or wealth tax in China.
China is a beautiful country with a fascinating culture and unending opportunities. If an American expatriate moves to China, they should be aware of the tax rates, deadlines, and regulations of the tax authorities in China, while not forgetting their obligation to file US expat taxes.
Questions About Your US Tax for Expats in China?
Greenback can help! Our team of expat-expert CPAs and IRS Enrolled Agents are here to help you understand the intricacies of US taxation, no matter where in the world you’re living. Contact us today!