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Tax Treaty Considerations for Expats in China

Submitted: April 2014

Tax treaties exist to protect taxpayers from being taxed twice on certain money flows between two countries. Treaties are particularly important if you have investments outside China, and intend bring money earned from them into China during your stay. They also apply if you build up some investments in China during your stay, and intend to leave them here after you have left China. China has the wide network of tax treaties in force with over 90 countries worldwide.

Most tax treaties will conform to the OECD Model Treaty and typically will state how the various forms of income are taxed. It will state whether the specific income is only taxed in China; only taxed in your home country, or taxed in both countries. It may also state what rate of tax is applicable in different cases. The treaty will also contain a definition of residence only for the purposes of the treaty; this is not the same as the definition of tax-residence in tax law. The types of income covered by a treaty may include:

  • property income
  • business profits
  • dividends
  • interest
  • royalties
  • capital gains
  • employment income
  • directors fees
  • income from sports and entertainment
  • state and private pensions, alimony and child support
  • money for the full-time education of students, and
  • income from teaching.

It is important to understand that a tax treaty applies to both money sent from and to China.

The withholding tax rate in China on dividends, interest and royalties sent to countries without a tax treaty with China is 10%, which is relatively low by global standards. So you are more likely to benefit from the treaty if you are remitting money into China from abroad during your stay. For example the tax rate on dividends sent from New Zealand to a country without a tax treaty is relatively high at 33%. The treaty with China calls for a maximum rate of 15%. This means that for dividends received from New Zealand there is a substantial saving as a result; though this may depend on the level of franking credits attached to the dividend. However as the highest withholding tax rate in China is only 10%, this is the rate that will be applied to dividends sent from China to New Zealand, rather than the 15% stated in the treaty.

A table showing the effective Chinese tax treaties is available here. For the complete rules and rates it is necessary to read the treaties themselves. These can be found by following a link attached to the country name in the table. The sections on dividends, interest and royalties are generally in the middle of the document. Towards the end of the tax treaty are sections dealing with income from artistic or sporting activities, followed by the treatment of students and teachers. There is also usually a section of the treatment of pensions.

Prior to arriving in China you may be able to arrange your existing investments so that the maximum advantage is gained from the terms of any treaty. This may involve moving investments from one non-China country to another to reduce the tax rate paid.

If your home country has a generally lower rate of tax than China, you may be able to use the residency definitions in the treaty to show that you are still a tax-resident in your home country. By doing this you may avoid paying some China tax on overseas income from work outside China and non-China dividends, interest, royalties and capital gains.

If your home country has a generally higher rate of tax than China, you may benefit by becoming tax-resident in China as early as possible. At the end of your stay in China you can also rearrange your affairs to ensure that any ongoing income from China employment or investments is also taxed at the lowest rate possible in the future.

 

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