Introduction

On 31 August 2018, the National People’s Congress of the People’s Republic of China (“PRC”) approved a number of reforms to the PRC Individual Income Tax (“IIT”) law, which came into effect on 1 January 2019. The definition of a “PRC individual tax resident” drew public attention due to its apparent stringency, and the introduction of anti-tax avoidance provisions also had a significant impact on Mainland Chinese nationals. In this article, we will look at the definition of a PRC tax resident and its implications on Hong Kong citizens and expatriates.

PRC tax resident

In Mainland China, worldwide taxation approach is adopted. As such, individuals who are PRC tax residents are subject to IIT on their worldwide income (that is, both PRC sourced and non-PRC sourced income), while non-PRC tax residents are subject to IIT on PRC sourced income only. Taxation on non-PRC sourced income (for example, income arising from Hong Kong) for PRC tax residents is different from that for non-PRC tax residents.

Under the IIT law, an individual is considered a PRC tax resident if any one of the following conditions is fulfilled:

·           the individual is domiciled in the Mainland (domicile factor); or

·           the individual has resided in the Mainland for 183 days or more in a calendar year (time factor).

An individual is domiciled in the Mainland if he/she habitually resides in the Mainland by reason of permanent registered address, family ties or economic interests. An individual with a household registration in the Mainland or a Mainland Chinese passport is generally regarded as domiciled in the Mainland and is thus considered a PRC tax resident.

Two relaxations to the worldwide taxation system for IIT were subsequently introduced in relation to the time factor, although they are only applicable to non-Mainland domiciled individuals. In contrast, a Mainland domiciled individual is subject to IIT on his/her worldwide income regardless of the length of his/her stay in the Mainland.

1.    IIT implementation rules

Article 4 of the amended IIT implementation rules states that non-PRC sourced income paid or borne by a non-PRC enterprise or individual is only subject to IIT if that individual, who is not domiciled in the Mainland:

·           has resided in the Mainland for 183 days or more during each year of the preceding six consecutive calendar years; and

·           did not stay outside the Mainland for more than 30 days in one single trip during any one of the preceding six consecutive years.

In this case, the individual would be subject to IIT on his/her worldwide income starting from the seventh year onward.

The Public Notice [2019] No 34 (“Notice No 34”) jointly issued by the Ministry of Finance and the State Administration of Taxation has further provided that the abovementioned “six consecutive years” shall take effect from 1 January 2019. As such, 2025 is the earliest year that a non-Mainland domiciled individual may be subject to IIT on his/her worldwide income.

It has been a common practice for Hong Kong citizens who require frequent travel to the Mainland to stay in Hong Kong for more than 30 consecutive days once every few years in order to avoid being subject to IIT on his/her worldwide income. This practice is commonly referred to as a “tax break”.

2.    Day-counting rule

In the past, an individual was considered to have resided in the Mainland for one whole day even if he/she was only there for part of the day. As such, for a Hong Kong individual who travels to the Mainland to work every Monday to Friday, he/she would be counted as residing in the Mainland for more than 183 days in a year, even if he/she travels back to Hong Kong every day. It is also noteworthy that an individual could be considered to have resided in Hong Kong for more than 180 days and in the Mainland for more than 183 days during the same year, and thus could have been simultaneously regarded as both a Hong Kong and a PRC tax resident.

The above day-counting rule was revised by Notice No 34. In particular, an individual is now only considered to have resided in the Mainland for one day if he/she has stayed there for the “whole day” (that is, a consecutive period of 24 hours in the same day, or from 12 am to the 12 am of the next day). This relaxation is significant to Hong Kong citizens who frequently travel to the Mainland to work but return to Hong Kong regularly after their working week. For instance, a Hong Kong citizen who works in the Mainland during the week, arriving on Monday and leaving on Friday, would now be considered as have resided in the Mainland for three days per week under the new rule (instead of five days under the old rule), because they are only there for part of the day on Monday and Friday. This revision makes a huge difference as the individual would now be counted as having resided in the Mainland for less than 183 days in a year under the new rule, as opposed to more than 183 days under the old rule.

On the other hand, for Hong Kong citizens working in the Greater Bay Area, it is common for them to travel back to Hong Kong every day after their work. Under the new rule, it is quite certain that he/she will be counted as residing in the Mainland for less than 183 days a year.

With the above two relaxations, the risk of being subject to IIT on worldwide income has been lowered significantly.

PRC sourced income

One should note that even if an individual is not a PRC tax resident, he/she is still subject to IIT for any income which is specifically defined as “PRC sourced income”. For the purpose of this article, we will focus on employment and office income.

It is a common misconception that the source of remuneration received by an employee depends on the location of the employer – for example, remuneration received from a Hong Kong company, would only be subject to Hong Kong salaries tax.

In fact, the source of employment income is generally determined by the location in which the employee provides the services. As such, if an individual receives employment income from a Hong Kong company but travels to the Mainland to work, his/her income is considered to be PRC sourced income.

Having said that, for directors and senior management personnel – even when he/she performs duties outside the Mainland – if their employment or office income is derived from a Mainland entity or the Mainland permanent establishment of a foreign entity, his/her income is still considered as PRC sourced income.

Tables 1 and 2 summarise the respective IIT implications for non-Mainland domiciled individuals who are (i) ordinary employees or (ii) directors and/or senior management personnel, under different scenarios.

 

Table 1: Ordinary employees (ü = Subject to IIT; û = Not subject to IIT)

	Duties outside the Mainland		Duties in the Mainland
Number of days residing in the Mainland	Paid / borne by non-Mainland resident entity	Paid / borne by Mainland resident entity	Paid / borne by non-Mainland resident entity	Paid / borne by Mainland resident entity
1.   > 183 days in each of the preceding 6 consecutive years, and has not stayed outside the Mainland for more than 30 days in one single trip in any of the preceding 6 consecutive years	ü	ü	ü	ü
2.   > 183 days in one year, but not > 183 days per year for  each of the preceding 6 consecutive years, or has stayed outside the Mainland for more than 30 days in one single trip in any of the preceding 6 consecutive years	û	ü	ü	ü
3.   > 90 days but ≤ 183 days	û	û	ü	ü
4.   ≤ 90 days	û	û	û	ü

 

Table 2: Directors and/or senior management personnel (ü = Subject to IIT; û = Not subject to IIT)

	Duties outside the Mainland		Duties in the Mainland
Number of days residing in the Mainland	Paid / borne by non-Mainland resident entity	Paid / borne by Mainland resident entity	Paid / borne by non-Mainland resident entity	Paid / borne by Mainland resident entity
1.   > 183 days in each of the preceding 6 consecutive years, and has not stayed outside the Mainland for more than 30 days in one single trip in any of the preceding 6 consecutive years	ü	ü	ü	ü
2.   > 183 days in one year, but not > 183 days per year for  each of the preceding 6 consecutive years, or has stayed outside the Mainland for more than 30 days in one single trip in any of the preceding 6 consecutive years	û	ü	ü	ü
3.   > 90 days but ≤ 183 days	û	ü	ü	ü
4.   ≤ 90 days	û	ü	û	ü

IIT calculation

For individuals who have worked both in and outside the Mainland (such as in Hong Kong) during a year, their IIT liabilities involve complex calculations which cannot be easily addressed in this article. However, below is a number of factors that will affect their IIT liabilities:

·           whether the individual is a director or senior management personnel;

·           whether the remuneration was paid / borne by a Mainland entity, a non-Mainland entity or co-paid / borne by Mainland and non-Mainland entities; and

·           the number of working days in the Mainland.

It should be noted that the definitions of “working day” and “day of residence” are different. As explained above, the definition of “day of residence” has been changed such that only a whole day (that is, a 24-hour period on the same day) is counted as one day. For “working day”, however, a stay of less than 24 hours in the Mainland during a day is still counted as half a working day.

Tax credit for Hong Kong residents

In the case of a Hong Kong individual resident, a tax credit is available if the same income is subject to both IIT and Hong Kong salaries tax under the Double Taxation Arrangement between Hong Kong and the Mainland. As such, the overall tax liabilities in Hong Kong and the Mainland should be considered in your tax planning.

A further discussion on the anti-tax avoidance provisions will be covered in the next article.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

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