China Tax: Six-year rule

The new Individual Income Tax Law (Order of the President of the People’s Republic of China no. 9 2018) and the related Implementing Rules (Order of the State Council of the People’s Republic of China no. 707 2018) that will be fully implemented from January 2019 provide a new definition of tax resident and introduced the so-called six-year rule.

According to the new Individual Income Tax Law, “the individuals who have a domicile in China or individuals who do not have a domicile in China but have resided in China for an aggregate of 183 days or more within a single tax year shall be deemed as resident individuals.”

However, individuals who have resided in China for 183 days or more within the single tax year can avoid being taxed in China for their worldwide income following the six-year rule as provided by the amended Implementing Rules of the Individual Income Tax, according to which taxpayers without a domicile in the territory of China and have not been tax resident in China for more than six consecutive years can continue to be exempted from the individual income tax on their foreign-sourced income that is not paid by a Chinese resident company or individual:

“An individual who has no domicile in China but has resided in China for not more than six consecutive years in each of which he resided for 183 days or more accumulatively shall be exempted from individual income tax on his income derived outside the territory of China and paid by any overseas entity or individual, subject to record –filing with the competent tax authority; where an individual left China for more than 30 days on a single trip in any year during which he resided in China for 183 days or more accumulatively, the consecutively years in each of which he resided in China for 183 days or more accumulatively shall be counted again”.

The six-year rule introduces a put-on-record filing required to claim tax exemption of the foreign-sourced income and further clarifications are expected to be provided.