What You Need to Know about the China 5-Years Tax Rule (2024)

Introduction

Many employers recruit foreign workers to work at their China-based companies. The promise of new opportunities, involvement in an interesting culture and new challenges are often motivating factors for foreigners to leave their current country behind and move to China.

However, employers and employees alike must be aware of important laws that may impact them to avoid surprises.

One important rule you need to have a thorough understanding of is the China 5 years tax rule. This rule can have a significant impact on the net pay that foreign employees receive.

However, strategic employers can limit employment terms so that the rule does not apply or take advantage of the first five years of residency.

Below, we discuss this rule and how it may impact your foreign staff.

Basics of the China Five-Years Tax Rule

Many individuals have a misunderstanding of the China 5 years tax rule. Some refer to it as the “China 5 years tax break,” but often this phrasing is misleading because the rule can actually cause a foreign worker to pay more in taxes.

The China 5 years tax rule requires foreign nationals who have resided in China for more than five full consecutive years to be treated as Chinese tax liabilities.

This makes them liable with local tax authorities for the pay they receive from their Chinese employer, as well as their global income. These individuals are subject to individual income tax.

Earnings Subject to the China’s 5-Years Tax Rule

The earnings that are subject to this rule are from the Chinese employee’s sixth year of residency in China and on for every full year that they are in the country.

The employee does not have to pay income tax for the first five years of residency.

In addition to any earnings the employee earns while in China, the employee’s other forms of income and gains are also subject to this rule, including the following:

• Earnings from dividends and capital gains
• Foreign interest earnings
• Rental income

These earnings do not have to be earned in China in order to be subject to the China 5 years tax rule.

Timing Definitions

A full year is typically defined as from January 1 to December 31 of any given year. However in Hong Kong, a year is considered 12 consecutive months.

When the China 5-Years Tax Rule Does Not Apply

There are certain situations in which this tax rule does not apply. For example, if the employee leaves China for more than 30 consecutive days or 90 days cumulatively, the rule does not apply.

Arrival and departure dates from China are considered days in China, which is important for foreign workers and their employers to know if they are trying to use this absence to avoid the 5-year rule.

If the employee is out of the country for this required amount of time, the five-year period restarts.

However, if the expatriate has already been in China for five full consecutive years, he or she can only break the five-year period if he or she spends less than 90 days inside China for any one-year period after the sixth year.

Get Help with the China’s Five-Year Tax Rule

The China 5 year tax rule – or China tax break 5 years – can be very confusing for foreign employers and employees.

Because of its potential impact on an employee’s overall pay and wealth, it is important to determine a tax strategy for expatriates who are currently living in China.

Our tax experts can consult with you on possible ways to comply with this tax rule and other Chinese tax laws.

Possible strategies include requiring extended stays out of the country during the first five years, offering a longer sabbatical for expatriates who have already accumulated five years’ residency or structuring employment contracts around this rule.

You can also use an experienced provider such as Horizons for assistance. By using a PEO, you can transfer the employer responsibilities to us so that you do not have to worry about complex tax rules.

Contact us today for targeted tax advice for your employees and business.