Expat Tax for Americans in China – What You Need To Know

Expat Living In China

Living overseas in China will be an interesting experience and an opportunity to immerse yourself in this new culture and to tour the country and see the amazing sites such as The Great Wall of China, Forbidden City, the Terracotta Army and more.

China has become a popular destination for many foreigners due to its fast development, favorable policies and excellent business opportunities. Below is a list of our top 10 most attractive Chinese mainland cities for foreigners to reside in (in no particular order):

• Qingdao, Shandong Province
• Hangzhou, Zhejiang Province
• Suzhou, Jiangsu Province
• Nanjing, Jiangsu Province
• Xiamen, Fujian Province
• Shenzhen, Guangdong Province
• Guangzhou, Guangdong Province
• Tianjin
• Beijing
• Shanghai

Guide To US Expat Tax In China

The Tax Samaritan country guide to US expat tax in China provides a general review of the tax environment of China. And how that will impact your U.S. expatriate tax return as a U.S. Expat In China.

As a U.S. taxpayer, all worldwide income is subject to taxation and reporting.

For most expatriates you have a requirement to file a U.S. tax return on on April 15 each year. There is an automatic extension to June 15 if you are residing overseas on the April 15 deadline.

The tax treatment for different classes of income can vary greatly from China and the U.S. For example, certain benefits may be tax free or eligible for exclusion from taxable income in China. But, in the U.S. these benefits are likely to be “non-qualified” benefits that are subject to inclusion as taxable income in U.S.

As such, there are a number of considerations related to US expat tax in China.

This brief article will address a few of those considerations.

China Expat Income Taxes

Who Is Liable For Income Taxes In China

In China, Chinese residents are subject to tax on both their “China-Source” income (income derived within China) and “Non-China Source” income (derived outside of China).

Individuals that are classified as nonresidents are subject to tax on the “China-Source” income only.

Who Is A China Tax Resident
A tax resident of China includes the following individuals:

• Individuals who have their domicile in China
• Individuals who do not have their domicile in China, but reside within China for at least one full year (365 days during one calendar year). If you are temporarily absent outside of China (i.e. outside of China for no more than 30 days), these absences outside of a China are not exempt from classification as day in China.

Individuals are considered to have resided in China for one full year if they reside in China for 365 days during one calendar year. For employment income, non-China-domiciled individuals who have resided in China for one full year but less than five years are subject to China individual income tax (IIT) on income earned from services rendered in China and on income earned from services rendered outside China but paid or borne by the individual’s China employer.

China-domiciled individuals are subject to China IIT on their worldwide income. Non-China-domiciled individuals who have resided in China for more than five consecutive full years are subject to China IIT on their worldwide income for every full year of residence, beginning with the sixth year, regardless of the mode of payment and place of payment of the income.

Tax Year In China And Tax Filing And Payment Rules

The tax year in China is the calendar year.

Expat Tax Withholding In China

The tax year in CHINA is January 1 to December 31. Foreigners must register with the local tax bureau.

Although the recipient of income is responsible for payment of income tax. It is generally done through a withholding system under which the payer is the withholding agent.

What You Need To Know About Living And Working In China For Your U.S. Expat Tax Return In China

When dealing with US expat tax in China, there a number of preferential expat tax treatments.

Each of which may benefit your U.S. expatriate tax return. In fact, for many U.S. expats it will reduce your U.S. taxes to zero.

Some of these preferential tax treatments or benefits for US expat tax in China include the:

• If you are a U.S. citizen or a resident alien of the United States and you live in China, US expat tax in China is based on your worldwide income and as such must file a U.S. return for all the years that you are residing in China. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings. There is an annual inflation adjustment for this exclusion amount. In addition, you can exclude or deduct certain foreign housing amounts. This is known as the Foreign Earned Income Exclusion and foreign housing exclusion.
• When it comes to US expat tax in China, most US expatriates worry about “double taxation” – paying taxes to two different countries – the U.S. and China. A U.S. taxpayer working overseas in China may be able to reduce U.S. taxable income and “double taxation” by claiming the Foreign Tax Credit on Form 1116. Should any foreign income not be fully offset by the foreign earned income exclusion, housing exclusion or housing deduction, the foreign tax credit paid or accrued may be used as a deduction or credit on the U.S. tax return. Taxpayers can elect to either deduct the taxes as an itemized deduction on Schedule A or claim a credit against tax. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

Common Mistake

A common but dangerous mistake is the assumption that if there is a zero U.S. tax liability with these tax benefits that there is no filing requirement for a US expat tax return while in Australia. That is not true.

If you are working overseas, it is likely that you meet the filing requirements to file a tax return. It is important to note that the preferential tax treatments, such as the foreign earned income exclusion and foreign tax credit are not applicable to the outcome of your tax liability until they are claimed on a filed tax return.

When faced with US expat tax in Australia there are many tax items to consider.

But, the above are by far the most common preferential tax benefits. With top-notch experience and knowledge of expat tax preparation from Tax Samaritan, we can assure that you are paying the least amount of U.S. taxes legally possible.

China Foreign Bank Account Reporting – The FBAR (FinCen Form 114)

Another important tax deadline that frequently applies to US expat tax in China is in regards to the disclosure of foreign assets on the FBAR (Foreign Bank Account Report – Form 114 – formerly known as TD F 90-22.1).

The FBAR filing deadline is April 15th (or the preceding business day if April 15th falls on a weekend). Fortunately, for the last few years an automatic extension to October 15th has been available for the FBAR deadline. Any filings after this date are known as a delinquent FBAR.

The FBAR must be filed with the Treasury Department (it is not filed with your federal income tax return) whenever you meet the FBAR filing requirements. This is whenever a U.S. person has a financial interest in, or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other type of foreign financial account (including an insurance policy with a cash value such as a whole life insurance policy) maintained with a financial institution, with an aggregate value of over $10,000 at any time during the calendar year based on the highest value of each foreign account during the tax year.

If you have bank accounts at HSBC, Bank of China, China Construction Bank or at another bank in China or any other foreign country, you may meet the filing requirement to disclosure your foreign accounts on the FBAR. Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.

U.S. – China Social Security Totalization Agreement

The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes.

These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country. As of this time, China has not entered into a Totalization Agreement with the United States thus there is opportunity to avoid double taxation of social security income for US expat tax in China.

U.S.- China Tax Treaty And Tax Relief For US Expat Tax In China

The U.S. currently has a tax treaty with China. Please click on the link to the U.S. – China Tax Treaty.

Qualified Dividends In China For Your Foreign Corporation or Investment

Since 2003, dividends paid to individual shareholders from either a domestic corporation or a “qualified foreign corporation” (force) are subject to tax at the reduced rates applicable to certain capital gains.

A qualified foreign corporation includes certain foreign corporations that are eligible for benefits of a comprehensive income tax treaty with the U.S.

China forco’s are eligible for this lower “qualified” dividend rate and it can be a significant benefit.