EU Businesses Seek Improved Tax For Expats In China

By Editorial 14 September, 2010

European businesses operating in China have highlighted tax difficulties with expenses paid overseas for expatriates seconded to work in China.

The European Union Chamber of Commerce in China (EUCCC) says many Foreign Invested Enterprises (FIEs) experience problems obtaining clearance from local bureaus of the State Administration of Foreign Exchange or banks, for reimbursement of expatriate expenses in foreign currency to foreign affiliates, which initially paid the employee expenses.

According to the EUCCC, there is no state-level foreign exchange regulation clarifying that a Chinese company employing a foreigner may reimburse expenses, unless the Chinese company has been recognized as a Multi-National Corporation (MNC) and the conditions for being recognized as an MNC are very stringent.

In the present situation, due to Chinese foreign exchange control, the EUCCC says foreign companies may not be able to charge back employment costs for employees who are expatriated or seconded to work for their Chinese affiliate companies.

When the reimbursement can not be made, the EUCCC maintains this often generates a tax burden in the foreign company's home country where such expenses may not be deductible. Alternatively, when the reimbursement is effected, a tax burden may occur in China for the foreign company as a result of taxation of the re-invoiced expenses, even though it does not make any profit in this respect.

Tax authorities, say the EUCCC, frequently refuse to issue a tax clearance or exemption certificate, unless Enterprise Income Tax (EIT) and Business Tax (BT) are paid on the reimbursement of expenses. Moreover, an additional tax burden arises for the Chinese affiliate which cannot deduct social security expenses borne by the employer. The EUCCC says foreign employees are also penalized as all or part of their social security contributions should be included in their Individual Income Tax (IIT) base.

These restrictions put an undue burden on foreign groups and FIEs doing business in China as well as foreign individuals, amounting to discrimination against the employment of foreigners in China, as employment of Chinese nationals is not subject to the same constraints, says the EUCCC.

The EUCCC recommends:

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