New China Residency Rules Increase Taxes on Foreign Workers

China has revised its residency rules, effective 1 January 2019. The changes could adversely affect foreigners who work in China.

Currently, foreign nationals working in China are taxed in China only on their Chinese income, unless they are residents of China for at least five years. After five years, such individuals are taxed on their worldwide income. However, the law requires residency for five “full” years before the tax on worldwide income takes effect. An absence for over 30 days on a single trip during the year, or more than 90 days over multiple trips during the tax year, will result in the individual not being treated as a resident for that year. Wise expatriates in China take advantage of these exclusions in their fifth or sixth years in China.

The new law eliminates the current “full year” standard in favor of one that treats the foreigner as being a resident if the individual is in China for at least 183 days during the year. This standard is the same or similar to that employed in many other countries, including the United States, and will mean that foreigners will likely be taxable on worldwide income after five years working in China. Also, it is unclear whether regulations under the new law will retain the five-year rule at all. If it is not retained, foreign workers could face immediate tax increases.

As a result, companies with long-term expatriate employees working in China will need to closely monitor the implementation of the new law. It could result is in significant tax increases for such workers if they have income from outside China in addition to wages there (such as rental or investment income from their home countries).

How This Impacts Mobility

Companies with expatriate employees in China could face significant increases in costs due to tax equalization policies, or may need to consider whether it is cost effective to locate employees there for a long term.