Tax risks for foreign expatriates even if with the removal of travel restrictions in China

updated on 27 September 2023 | reading time approx. 2 minutes

With the removal of travel restriction in China, a lot of foreign expatriates restarted their plan of re-entering China. Many of them keep an employment relationship with a Chinese company only, who is also their only source of salary income. They may plan to return to China for continuing their responsibilities with the Chinese employer.

In another situation, some foreign expatriates may be used to the remote work mode from their home countries, to fulfill their job responsibilities with their Chinese employer. Despite of the removal of the Chinese travel restrictions, they still choose to base in their home country during the remaining period of their Chinese employment contracts.

It is noteworthy for the foreign expatriates to review the relevant tax consequences in the above two situations.

According to the current Chinese tax regulations, for foreign expatriates who hold a position with a Chinese employer only, the salary paid by the Chinese employer should anyway be fully subject to Chinese IIT, irrespective of how many days the expatriates stay in China or where the work related to this position is carried out.

Under normal circumstances, foreign expatriates carry out most of the employment related activities in China to contribute to the daily operation of the Chinese employer and to perform professional and management tasks on site. This means that usually such expatriates would not stay in their home country for more than 183 days either in a calendar year or a rolling year. As a result, their salaries should be regarded as China-sourced income, and the home country of the expatriates should give up the taxation right on these salaries, in accordance with most international tax treaties. Therefore, double taxation dispute would not arise.

But when the foreign expatriates stayed in their home countries for more than 183 days in a calendar year before their returning to China, or even continue to base in their home countries, the tax consequences would become complicated and even undesirable.

When a foreign expatriate stays in his/her home country for more than 183 days in a certain calendar year, he/she may be in general not regarded as a Chinese tax resident for that year. In such case,

i) if he/she becomes a tax resident of the home country, he/she may refer to the double tax treaty between China and the home country and apply for avoidance of double taxation at his/her home country. Nevertheless, as mentioned above, China anyway imposes income tax on his/her full salaries according to Chinese domestic tax regulation, based on the understanding that the employment-related activities, wherever they are carried out, contribute fully to the Chinese employer who also fully bears the salary costs.

However, such treatment might be interpreted as a violation of double tax treaty, considering that the activities are carried out outside China and should not be regarded as China-sourced income. Also, China, where the expatriate's tax residency does not belong to, may not have right of taxation on the salary income. From this point of view, the home country may possibly reject the tax exemption treatment/credit treatment on the salary income and ask the expatriate to apply for tax refund from China, which, based on our practical experiences, has rare chance of success.

ii) if he/she would not become a tax resident of the home country even by staying there for more than 183 days, it could happen that the expatriate is tax resident of nowhere for the calendar year. In principal, no double tax treaty could be applied in such case, while the home country could claim for income taxation on salary income (borne by the Chinese employer) according to their domestic law based on the fact that he/she stays there to carry out employment-related activities for a certain period of time. As a result, double taxation could also be triggered if China also claims the full taxation right on the salary income.

Things could look better if the expatriate is considered as domiciled in China, e.g., in cases where he holds a Chinese green card, is settled down with family in China and all the economic interests are closely related to China, etc. In this circumstance, even if the expatriate stays in China for less than 183 days, he is still a Chinese tax resident and could claim for Chinese tax credit on his foreign income tax by referring to the double tax treaty between China and the foreign country. However, in such case, such a status change may lead to his worldwide income being subject to Chinese income tax on a long-term basis.

Even if with the travel restriction in China has been removed, the taxation under cross-border employment or business arrangements is always complicated. Due to the diversification in tax laws as well as the discrepancy in understanding and interpretation on tax treaties in different countries, to solve and avoid double taxation is never an easy topic. It requires detailed case-by-case analysis, and a close cooperation between experienced tax advisors from all involved countries.