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October 15, 2016

Death and (Expat) Taxes

by mikediliberto

On your hundred-and-eighty-third day in China during any calendar year, you cross the line from “business traveler” to “part year tax resident’. If you have a resident permit, receive salary payments in Chinese Renminbi, or if you happen to have an ownership stake in the parent company of a China subsidiary, you most likely become a tax payer in China the moment you set foot on the mainland. Like any tax situation, you may get away with violating the law for a short period of time but heed this advice: Don’t do it! The only things are are assured of are death and taxes, and on death I’m actually not one hundred percent sure.

In the course of my time traveling and working overseas, I’ve received lots of advice, good and bad, regarding taxes and payments in China. Beyond getting this advice, I’ve also lived the reality of living for many years in China, receiving payments as a resident of China and filing taxes as a US passport holder. So lets clear a few things up. First, a few examples of the wrong advice I’ve received:

  • You can only convert $500 Dollars worth of Renminbi into foreign currency. This is kind of true but only applies to people not legally employed in China. So long as you’ve paid your taxes you can convert any amount up to your net salary payment (more on this below)
  • You don’t need to file US taxes if you work overseas. Danger! If you take nothing else from this post, know this: if you are a US citizen, the US government has a claim to any money your earn, anywhere on earth, for any reason, at any time. Until you renounce your citizenship, every cent that comes to you anywhere in the world is taxable income to the US government. (fun fact: if you do renounce your citizenship, there is a tax for that too).
  • Foreigners in China are not subject to the salary deductions for social security or medial care. This was true in the past, but it is no longer the case in most cities. Don’t expect most small-company Chinese HR staff to know anything about taxes for foreigners. Get good advice from a specialist.
  • Tax rates are lower in China. Hmm..Sometimes, but for most expats not usually. China’s highest tax bracket is higher than the highest bracket in the USA.
  • You can work and be paid in China with just a China work visa. Nope nope nope. You can work in China on a work visa, so long as you are performing work for an overseas entity; working in China, for a Chinese company, requires that you have a work permit first and foremost.

Ok, so with the mis-information out of the way, lets talk about Renminbi. The Chinese Yuan or more colloquially the “Renminbi” is not a freely traded currency. Unlike dollars or Euros, which many banks can trade for other currencies, the Renminbi is only convertible by the People’s Bank of China. What this means is that when you have Renminbi, for example if you have been paid in Renminbi for goods or services, you can only convert that currency if you can prove that the appropriate tax has been paid to the local tax bureau. Regulations for conversations are administered by SAFE (State Administration for Foreign Exchange) and regulations change regularly. Expect your bank to be well versed in the current regulations but be prepared to argue if they tell you that you’re “not allowed to convert your RMB under any circumstances”.

Most commonly, if you are an individual that is employed in China and are being paid in Renminbi (usually abbreviated “RMB” even though the official abbreviation for Chinese currency is “CNY”) then you will likely have a need, at some point, to convert your salary payments into either dollars or Euros. The method for doing so is complex, but something I have done countless times in the course of my work in China. First, hopefully you do your banking in China in a major city where the staff at the bank will at least be somewhat familiar with the transaction of converting currency and the transferring overseas of that same currency. To convert your currency you will need to have on hand the following documents:

  • a pay stub, issued by your company, with your name, passport number, pay period, pay amount, tax paid, and net pay as deposited to the bank. This pay stub must have the company chop (see chapter XX for more discussion of the company chop); the pay stub can just be a normal printout so long as it has the company chop applied.
  • Your employment contract, executed in Chinese language, with the company chop, signed by you as well as the director or general manager of the Chinese company. The contract must specify your renumeration, and this number must match your gross salary as listed on your pay stub.
  • Your passport with a valid residence permit derived from a previously issued Z-Visa.
  • Your employment permit for the People’s Republic of China. It goes without saying that you can only convert currency earned during the validity period of your employment permit.
  • A tax receipt from the tax bureau in the jurisdiction of your employment showing tax paid for the related pay stubs. Must have the appropriate chop of the tax bureau. One important note: the tax receipt will show the period in which the tax was paid, however this will be (generally) the pay period beyond the one listed on your pay stub. I actually had to change our company pay stub format to show “Earned Period” and “Paid Period”, so that “Paid Period” lined up with the period shown on the tax receipt.
  • The blood of an under-two-year-old unicorn. Ok, kidding here. But be forewarned if so much as a comma is out of place on any of the above documents, you will be sent away to correct the documents before the bank will approve the currency conversion. A lot of things in China are flexible; government paperwork is not one of those things.

An important note about net salary. Many firms in China, in order to provide a more favorable package to their employees, structure pay in two parts; standard salary and an allocation of reimbursable expenses. For example, your salary may be 100,000 RMB per month, but it could be structured as 70,000 RMB in cash and then 20,000 for an apartment and 10,000 for dining out, entertainment, and language lessons. For the latter items, your company would expect you to provide an official receipt (called a “fa piao”), against which they will reimburse you for that expense. This has the effect of pushing your salary into a lower tax bracket (click here for a foreigner tax calculator), since, legally speaking, those types of expenses are deductible in China. Note also, that these types of reimbursements are not always deductible in your home country, so again, consult a tax professional.

Here is where reimbursements get complicated: if you do not, in a given month, spend all of your allocated “reimbursable expenses”, your company may opt to deposit the difference into your bank account with your salary. If they do so, that amount is not convertible until you pay taxes on it as well. Be forewarned, your company should not do this, as it complicates your tax situation. Unreimbursed expenses should be carried over month to month, but they MUST be paid out by the company by the end of the calendar year. You’ll find in December that illicit “fa pio dealers” flood the streets of many major cities. Bottom line is, without showing you paid tax on your Chinese currency, you can’t convert it to a freely tradable currency. I had a few expat employees in China that would make a sport out of grabbing any unclaimed fa piao wherever they went.

Lets assume you get your money converted. Now you need to do something with it. Usually your bank will open a second account for you denominated in, for example, US Dollars. Once you convert your RMB into Dollars, they will be deposited into your US Dollar account. Now you’re free to initiate a wire transfer to get that money out of China and back to your home country. Assuming your home country is the USA, you’ll initiate the transfer in China, with the beneficiary of the transfer being your bank account back in the US. You will need to ask your US bank for instructions for foreign-originated wire transfers, which is likely the bank address and SWIFT code, along with your personal account details.

Important note here: Save those Chinese tax receipts. Now that you’ve sent some inbound wire transfers to yourself in the US, the IRS is going to want some details about where that money came from. In cases where you transfer in ten thousand Dollars or more as a single transaction, the receiving bank will send an immediate notification the IRS; for multiple smaller amounts this may or may not happen but usually twelve sub ten thousand dollar transfers in a year is enough to trigger a notification. So, with your tax receipts and the lease for your Chinese apartment in hand, you’ll need to sit down with your tax professional and file a report of foreign earned income and foreign tax paid. Assuming you meet the bona-fide domicile test (usually met by your Chinese lease agreement), you will be exempted from tax liability of the first ninety thousand dollars of income. Note that this has no relation to the money you converted to US Dollars and transferred to the US; the IRS is only interested in the total earnings you were paid overseas. For amounts over the exemption, you will need to pay the difference between your US tax liability and your foreign tax paid.

Permanent establishment

A quick word on a really, really complicated set of regulations: Permanent establishment.

Lets say, for example, you run a company in the US that is in the business of providing products sourced in China, you likely have employees that (or you yourself) spend a great deal of time in China. If you or one of your employees meets the 183 day mark that triggers their personal tax liability in the People’s Republic of China, your firm is at risk of being declared as having a permanent establishment in China. Simply put, this puts the company at risk of owing corporate tax on the activities performed by employees that have spent time in China.

I will repeat the advice of my father the Attorney: Consult an attorney to get advice before you get in trouble.

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