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Prc Individual Income Tax

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									  Tax, Payment and
Compensation in China
      January 31, 2008

Main Topics

 • PRC Individual Taxation
 • Social Security Contributions
 • Reward Practice in China

Main Topics

 • PRC Individual Taxation

PRC Individual Taxation
                                                        ------Tax Payer

 Individuals who have a domicile or place of abode in China are
  subject to IIT (Individual Income Tax) on their worldwide income
 Individuals who do not have a domicile in China are taxed in
  accordance with their length of residency in China
     Nonresidents and residents in China for not more than 1 year shall be subject
      to tax on their China-source income;
     Residents in China for more than 1 year but less than 5 “full” “consecutive”
      years are subject to tax on both their China-source income and their foreign-
      source income borne by Chinese entities or individuals; and
     Residents in China for five consecutive “full” years or more are subject to
      tax on their worldwide income.
PRC Individual Taxation
     ------ Special provision under tax treaties
•   According to various double tax treaties between the PRC
    and other countries, there is special provision of tax
    exemption for employment income if the three requirements
    are all met:
    -   Expatriates stay for a period or periods not exceeding aggregate 183
        days in one calendar year or any period of 12 months;
    -   Remuneration is paid by, or on behalf of, the overseas entity; and

    -   Remuneration is not charged back to China entity.
•   Any of the above three requirements cannot be met (e.g. the
    cost is charged back to China entity), expatriates will trigger
    China tax.
PRC Individual Taxation
                      ------ Taxable Income

 • Base salary
 • Bonus (e.g. sign-on bonus, year-end bonus, performance
   bonus, etc.)
 • Allowances (e.g. housing allowance, cost-of-living allowance,
   transportation allowance, etc.)
 • Stock option
 • Social insurance / commercial insurance premium
 • Other income related to employment in PRC

  PRC Individual Taxation
                 ------ Tax relief for expatriates
• Some types of foreign assignment allowances, if paid in cash are
  subject to IIT, however, if they are paid under reimbursement
  arrangement, or paid by company directly to the third parties, they
  could be exempted from PRC IIT. Such allowances mainly refer to
  the following:
   – Reasonable meal and laundry allowance
   – One-off relocation allowance
   – Host country housing expenses
   – Actual language training for expatriate employee and actual children tuition
   – Reasonable home leave allowance
• However, there is likely to be scrutiny from the tax bureaux in this
  regard, thus, certain supporting documents should be kept
  complete and accurate.
PRC Individual Taxation
          ------- Withholding responsibilities

•   Tax registration with respective tax authorities is required
    and the IIT return should be filed on monthly basis;
•   Local employing entity has tax reporting and withholding
    responsibility on its expatriate employees’ employment
    income, including those paid through overseas payroll, on
    monthly basis, and remitting the IIT due to the tax
•   If an expatriate comes to the PRC for a project and has no
    withholding entity, he/she self shall report his/her IIT; and
•   Late payment surcharge at daily rate of 0.05%, and penalty
    will be imposed if failure of compliance.
PRC Individual Taxation
           ------- Annual filing requirements

 Main content: individuals whose annual income exceeds
  RMB120,000 are required to file an annual IIT return to the
  tax authorities by the end of following March;

 Exception: foreign individuals who do not stay in China for
  "one full year” are not required to file annual return; and

 Note: annual filing requires individuals to report all
  taxable/non-taxable employment/non-employment income (e.g.
  lease gain, investment income, etc.), which is more
  comprehensive than monthly IIT filing.

PRC Individual Taxation
             ------ Tax planning possibilities

• PRC IIT is fixed at a progressive rate between 5% ~ 45%

• Tax Planning mainly lies in threes areas:
   – Identify the PRC sourced income
   – Structuring the C&B package so that non-taxable income could be
   – Sliding down the progressive tax rates

Main Topics

 • Social Security Contributions

Social Security Contributions

• Under PRC labor law, statutory social benefits mainly include:
   - Basic Pension
   - Basic Medical insurance
   - Unemployment insurance
   - Housing Fund
• Each item is determined at a stipulated percentage of the
  individual’s monthly average salary of the preceding year
  subject to cap and floor limits, which are set by reference of
  300% / 60% of the city average salary of the previous year
Social Security Contributions

• The percentage contribution requires for both the
  employee and employer vary among different cities and
  are governed by local regulations

Employer and Employee Contribution
                     ------ Shanghai

                                Employer   Employee
 Basic Pension                    22%        8%
 Basic medical insurance          12%        2%
 Unemployment insurance           2%         1%
 Maternity                       0.5%         0
 Work-related insurance          0.5%         0
 Housing Fund                     7%         7%

Social Security Contributions

•   Existing Social Security programs only applicable to PRC nationals
    though there is regulation requires the resident of Taiwan, Hong Kong
    and Macao who are employed in China to contribute the statutory social
    security as normal PRC employees. It appears that local governments
    did not keep pace well with the central government;
•   Local China regulations do not support foreign nationals to contribution
    to pension funds in China and language barriers exclude foreigners from
    using local medical facilities; and
•   Most companies provide their expatriates with:

     -   International/local commercial medical insurance plans
     -   Continuation of home country based pension contributions

Main Topics

 • Reward Practice in China

Reward Practice in China

 • In China, normally a local Chinese employee’s total package would
   consist of Annual Guaranteed Pay, Variable Pay and Benefits
                                       Base Salary (i.e. base salary x 12 months)
                                       Fixed Allowance
                   Guaranteed Pay      (e.g. clothing allowance, meal allowance,
                                       transportation allowance, cash allowance etc.)
    Compensation                       Fixed bonus
                                       (e.g. 13th month salary)
                   Variable Pay (i.e. short term, e.g. annual bonus, commission, etc. and
                   long term incentive, e.g. stock option, etc.)
                   Mandatory Benefits
                   (i.e. pension, housing, medical and unemployment)
                   Supplementary Benefits
                   (e.g. supplementary housing, supplementary pension, medical, etc.)
Contact persons

Nora Wu – Partner                  Gertie Chen – Manager
PricewaterhouseCoopers             PricewaterhouseCoopers
11th Floor, 202 Hu Bin Road        11th Floor, 202 Hu Bin Road
Shanghai, 200021 P.R.C.            Shanghai, 200021 P.R.C.
Tel: +86 21 6123 2517              Tel: +86 21 6123 2628
E-mail:         E-mail:

Tore Østebrød – Director
P.O. Box 748 Sentrum
0106 Oslo, Norway
Tel: +47 9526 0676



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