Countdown to the six-year deadline: Tips for expats in China

published on 4 April 2024 | reading time approx. 3 minutes

According to the Chinese Individual Income Tax (IIT) Law and its implementation regulations that came into effect in 2019, individuals without a domicile in China are exempt from IIT on income derived from outside of China. This income must be paid by a foreign company or individual.

The six-year rule and its significance

However, this exemption applies only, if the individual has not stayed in China more than six consecutive years and has spent a total of 183 days or more in China during each year. If an individual, in a year where they have stayed in China for a total of 183 days or more, leaves China for more than 30 days on a single trip, the consecutive years during which they stayed in China for 183 days or more are reset to zero.

Calculation of the six-year rule

This is known as the “six-year” rule. The starting point for the "six-years" of continuous residence in China for the year in which the 183 days are accumulated will be calculated from 2019 (inclusive) onwards.

In other words:

Six-Year Cycle: The year 2024 will be the end of the first cycle of the six-year rule if no further policies are introduced to amend the rule.
Residence Conditions: A foreign individual must have stayed in China for more than 183 days in each calendar year from 2019 to 2024 and has not left China for more than 30 days in any of these years on a single trip.
Declaration of Global Income: If the above conditions apply, theoretically, the person must declare their worldwide income in China in the year 2025 if they again stay in China for more than 183 days in the same year.

Expected changes and new guidelines

Considering that 2025 will be the first time that expatriates will be required to declare their worldwide income to the Chinese tax authorities under the six-year rule, we still need to wait for the subsequent guidelines to help us solve the problems we may encounter in practice.

Recommendations for expatriates in China

We would like to remind expatriates in China to take note and review the immigration records for the past five years to determine whether a departure plan for more than 30 days should be considered in 2024 to renew the "six-year" cycle and avoid the obligation of declaring the worldwide income in China in the future.

If it is unable to arrange a timely departure plan and you will be faced with the obligation of declaring your worldwide income in China, it is recommended to seek timely advice from a tax expert to sort out your worldwide income, as well as the tax liabilities already paid in your income-sourcing country, in order to comply with the tax compliance requirements of each country concerned.

For those intending to repatriate to the respective home countries, it is advisable to navigate through the tax regulations therein. In our practice, we have observed instances where returning expatriates overlooked the necessity of declaring their foreign investments, including holdings in offshore banks. Moreover, certain jurisdictions, such as Germany or Austria, impose taxation on capital gains from shares or funds, calculated based on their initial cost, even if the appreciation occurred outside the borders of the returning countries.

Last but not least, we would like to remind expatriates in China that the above six-year rule only applies to expatriates who are not domiciled in China. In other words, expatriates who are deemed to be domiciled in China will not benefit from the "six-year" waiting period and will theoretically be required to file a tax return in China on their worldwide income on an annual basis.

Determination of domicile

To determine whether a foreign individual is domiciled in China, there is a complex combination of factors to consider, and the result depends to some extent on the discretion and judgement of the Chinese tax authorities. The much publicized Chinese "green card" is certainly an important factor to consider, but holding a "green card" does not in itself lead directly to the inescapable conclusion of whether one is domiciled in China, nor does it lead directly to the obligation of declaring worldwide income in China.

Complexity of tax residency

In addition, if the foreign individual retains a local domicile under the relevant laws in the home country, such as Germany, the determination of ultimate country of tax residence and the unlimited tax payment obligation on the worldwide income, will be a complex issue that needs to be considered in conjunction with the domestic tax laws of both countries as well as the "Tie-breaker Rules" of the relevant Double Tax Treaty.