Tax Residency in China
1. Criteria for Determining Tax Residency in China
According to Article 1 of the Individual Income Tax Law of the People's Republic of China, an individual is considered a resident taxpayer in China if they meet any of the following criteria:
- Having a domicile in China;
- Residing in China for a period of 183 days or more in a calendar year;
- Having a permanent residence in China and residing in China for a period of less than 183 days in a calendar year.
For entities, the Enterprise Income Tax Law of the People's Republic of China defines a resident enterprise as one that is incorporated in China or has its place of effective management in China.
2. Impact of International Tax Treaties on Tax Residency Criteria
China has entered into a network of tax treaties with various countries to avoid double taxation and promote cross-border trade and investment. These treaties may modify or provide exceptions to the standard criteria for tax residency as defined in domestic law.
One of the key provisions in these treaties is the "tie-breaker" rule, which is used to determine the tax residency of an individual who is considered a resident of both China and the treaty partner country under their respective domestic laws. The tie-breaker rule typically considers factors such as the individual's permanent home, center of vital interests, and habitual abode.
For example, the China-US tax treaty provides that an individual is considered a resident of China if they have a permanent home in China and spend more than 183 days in China in a calendar year. However, if the individual also has a permanent home in the US and spends more than 183 days in the US in a calendar year, the tie-breaker rule will apply to determine their tax residency.
These treaty-specific modifications aim to provide clarity and prevent double taxation by establishing clear rules for determining tax residency in cases involving cross-border activities. They reflect the mutual agreement between China and its treaty partners to facilitate tax compliance and enhance economic cooperation.
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