China’s income tax reforms, which came into effect on 1 January, offers some relief for the country’s low and middle-income earners, but takes a tough stance on foreign workers and high-income groups.
China’s individual income tax reforms, which came into effect on 1 January, are expected to have wider implications abroad as a more stringent definition of «resident» is being used, and more scrutiny is placed on high-income groups, Bloomberg reported.
Bloomberg noted that personal wealth is estimated to have reached $24 trillion in 2018, with $1 trillion held abroad. As such, tax authorities are expected to keep a closer watch on asset and investment holdings.
The slate of tax reforms, which allow for deductions in areas such as housing, education, health care and aged care, aims to provide relief from the rising costs faced by low and middle-income earners, ostensibly to increase consumer spending in response to the ongoing U.S.-China trade war.
Residency Rule Changes
However, the changes are getting expatriates in China and the wealthy worried over the greater scrutiny they will be under as tax authorities have been given greater power to enforce rules and expand tax collection.
The most significant change for them is the 183-day-rule of residency – individuals who are resident in China for 183 days or more a year are now considered tax residents, and is therefore subject to tax on their global income. This replaces the previous rule that only subjected foreigners to Chinese taxation on their global income if they lived in China for more than five years, which could be easily circumvented.
Crackdown on Wealthy
The crackdown on rich Chinese has led to a rush of Chinese nationals setting up overseas trusts, as apart from changes to residency rules, owners of offshore companies will be subject to taxes on dividends and levies of up to 20 percent on corporate profits. By setting up overseas trusts, they will not have to pay taxes if no dividends are issued.
Additionally, wealthy Chinese holding overseas passports will also no longer be able to avoid paying taxes as all holders of Chinese household registrations will be taxed on their global incomes. People surrendering Chinese citizenship will have to be audited by tax authorities and possibly explain all their sources of income, tax specialist Peter Ni from Zhong Lun Law Firm said, Bloomberg reported.
Gifts are also expected to be more closely scrutinized and may be taxed to prevent the transfer of assets to relatives or third parties to avoid tax liabilities.