According to the current Individual Income Tax Law, individuals domiciled in China and expatriates who have lived in China for more than five full consecutive years are subject to personal tax on their worldwide income. For the expatriates, the taxation on the worldwide income starts in the subsequent year after the five full consecutive years.
The so-called five-year rule provides that a foreign individual is considered to have lived in China for five full consecutive years if he has been residing in the country for a full year in each of the past five consecutive years. Individuals who have lived in China for 365 days in a tax year are regarded as having lived in China for a full year; it shall be noted that a single temporary absence from China not exceeding 30 days or multiple absences not exceeding a total of 90 days within a tax year are not deducted from the total days spent in China.
If the five-year rule is established, the tax payer is subject to income tax on his worldwide income sourced within and outside China if he lives in China for one full year in any of the years from the sixth year onwards.
Currently, a foreign worker employed in China can avoid being subject to Chinese individual income tax on his or her worldwide income by leaving the country for more than 90 days (in case of cumulative multiple absences) or than 30 days (in case of single absence) during the five years period.
The new Implementing Regulations of the Individual Income Tax Law issued for comments on October 20 2018 confirms that the five-year rule will be applied after the entry into force of the new IIT Law, with some important changes.
According to the Implementing Regulations, for individuals who do not have a domicile in China but that have lived in China for a total of 183 days but less than five years or for five years and having a single departure for more than 30 days, the income derived outside China will be subject to individual income tax for the part paid by chinese enterprises, individuals and institutions. If the taxpayer has lived in China for a total of 183 days in a row for five consecutive years and has not a single departure for more than 30 days within the five years, from the sixth year onwards, if the residence in China is over 183 days, he or she will be subject to personal income tax on any income derived outside China.
The five-year rule has been an important tax benefit in order to attract foreign talents in China and the authorities seem to be determined to continue down this path. The Implementing Regulations adjusted the time standard for residents from the one year to 183 days, making easier for expat workers to be considered tax resident in China.
The Implementing Regulations of the new Individual Income Tax will be available for comments and discussions until November 4, 2018 and is expected to enter in force from January 1, 2019.