港人內地投資稅網錦囊

港人內地投資稅網錦囊

Simon Lam

PRC Tax Issues Frequently Faced by Hong Kong Citizens in the PRC

Comparison Between HK & PRC Tax

•Types of Taxes

•Tax agreement between HK & PRC

Types of Taxes – Hong Kong

Direct Tax• Profits Tax• Salaries Tax• Property Tax

Indirect Tax• Stamp duty• Alcohol Tax• Airport Tax• Vehicle Import Duty, etc.

Types of Taxes – PRC

Turnover Tax (流轉税 )• Value Added Tax (增值税 )• Business Tax (營業稅 )• Consumption Tax (消費稅 )

Income Tax (所得税 )• Enterprise Income Tax (企業所得税 )• Enterprise Income Tax on Foreign Investment

Enterprises and Foreign Enterprises (外資企業所得税 )• Individual Income Tax (個人所得税 )

Types of Taxes – PRC

Property Tax (財產稅 )• Urban Real Estate Tax (城市房產稅 )• Real Estate Tax (房地產稅 )

Activity Tax • Resource Tax (資源税 )• City Maintenance and Construction Tax (城市維護建設稅 )• Real Property Gain Tax (土地增值稅 )• Stamp Duty, etc.

Scope of Charge

Hong Kong

Territorial Concept

PRC

Residence Concept• Resident: Worldwide Tax

• Non-resident: Only tax on China-sourced income

Tax Year

Hong Kong• April 1 to March 31• Each company can have

its own fiscal year end• Provisional Tax year

PRC• January 1 to December

31• All enterprises basically

have the same fiscal year, i.e. the calendar year

• No provisional tax payment system

Filing Deadline

Hong Kong• Corporate: Different deadline

follow enterprises’ fiscal year end

• Individual: One month after issuance of return

PRC• Corporate: Within 4 months

after the end of fiscal year

• Individual: Monthly before the 7th of each following month

• VAT: 1 day, 3 day, 5 day, 10 day, but usually monthly within the 10th of each following month

• BT: monthly before the 10th of each following month

• Others

Tax Filing System

Hong Kong• Basically, self-reporting

system

PRC• Self-registration and self-

reporting system

• Withholding system

Tax Rates

Hong Kong• Corporate: Fixed 17.5%

• Individual: Progressive or fixed 16%

PRC• Local: Fixed 33% but lower

rate for lower profit enterprises

• FIE: Fixed 33% or 15% but different rates due to local or statutory preferential treatment

• Individual: Progressive rate on salary income from 5% to 45%, fixed rate of 20% for other income

• VAT: 0%, 4%, 6%, 13% & 17%

• BT: 3% to 20%

Salaries Tax / Individual Income Tax

Hong Kong

Scope• Source rule

Threshold• 60 days

PRC

Scope• Residence rule

• Source rule

Threshold• 90 days or 183 days for treaty

country

PRC – Residence vs Source Rule

Days in China China Source Overseas Source

<90/183 Taxable * Non-taxable

90/183<x<1 year Taxable Taxable *

1<x<5 years & senior executives

Taxable Taxable *

x>5 years Taxable Taxable

* Tax on a day in day out basis, but different formula

Salaries Tax / Individual Income Tax

Hong Kong

Deductions• Personal Allowance

• Dependent Allowance

• Mortgage Allowance

• Education Allowance

Rate (2004/05)• 2% to 20%; or

• 16% fixed

PRC

Deductions• Local: RMB800 (per month)

• Expatriate: RMB4,000 (per month)

Rate• 5% to 45%

Individual Income Tax

Who is a Taxpayer?

Individuals who are domiciled in the PRC i.e. those who have permanent registered address, family or economic interests, habitually resides in the PRC

Individuals who have resided in the PRC for a certain length of time.

Note:

“One year” means 365 days in a Tax Year (1 January to 31 December).

This does not exclude “temporary trips out of the PRC” (absence not more than 30 days during a single trip, or not more than a cumulative total of 90 days over a number of trips, within the same Tax Year)

Taxable Income

• Wages and salaries (工資、薪金所得 )

• Operating income of privately owned businesses (個體工商户的生產、經營所得 )

• Income from contracted management or leasehold management for enterprises or institutions (對企業事業單位的承包經營、承租經營所得 )

• Remuneration for labor services (勞務報酬所得 )

• Income from author’s remuneration (稿酬所得 )

• Income from franchise royalties (特許權使用費所得 )

Taxable Income (cont’d)

• Interest, dividends, and bonuses (利息、股息、紅利所得 )

• Income from the lease of property (財產租務所得 )

• Income from the assignment of property (財產轉讓所得 )

• Accidental income (偶然所得 )

• Any other income deemed taxable by the Finance Department of the State Council (經國務院財政部門確定徵稅的其他所得 )

Individual Tax Rates

Wages and salaries (工資、薪金所得 ):

Monthly Taxable Income (RMB)Monthly Taxable Income (RMB) Tax Rate (%)Tax Rate (%)

00 - - 500500 55501501 - - 2,0002,000 10102,0012,001 - - 5,0005,000 15155,0015,001 - - 20,00020,000 202020,00120,001 - - 40,00040,000 252540,00140,001 - - 60,00060,000 303060,00160,001 - - 80,00080,000 353580,00180,001 - - 100,000100,000 4040100,001 and above100,001 and above 4545

Individual Tax Rates

Operating income of privately owned businesses (個體工商户的生產、經營所得 ):

Annual Taxable Income (RMB)Annual Taxable Income (RMB) Tax Rate (%) Tax Rate (%)

00 - - 5,0005,000 555,0015,001 - - 10,00010,000 101010,001 -10,001 - 30,00030,000 202030,001 -30,001 - 50,00050,000 303050,001 and above50,001 and above 3535

Non-Employment Income:

• Other investment income include income from royalties, interest, dividend, leasing properties, assignment of properties etc

IIT levied on gross amount at 20%

Individual Tax Rates (Cont’d)

Expatriate Employees

The extent to which an expatriate employees is subject to PRC individual income tax generally depends on:• The individual’s length of time in the PRC; and• The source of income.

“Source of income” = wages and salaries earned by individuals during the actual course of their work within the PRC, regardless of whether they are paid by enterprise employers or individual employers within or outside the PRC.

Expatriate Employees (cont’d)

“PRC-sourced income” include “income from personal serviced provided inside the PRC because of the tenure of office, employment, the performance of a contract, etc”.

“Non- PRC-sourced income” refers to wages and salaries earned “during the actual course of work outside PRC”.

Expatriate Employees (cont’d)

Items “temporarily exempted from individual income tax”:• Reasonable allowances for housing, meals and laundry received

in a non-cash form or on a reimbursement basis in either HK or PRC;

• Reasonable one-off relocation costs on a reimbursement basis;• Reasonable allowance for business trips both inside and outside

the PRC;• Allowances for home leave to visit family members, language

training, and children’s education, provided the costs are approved as reasonable by the PRC authorities.

• Mandatory offshore insurance premium

Length of Residence

General Rules

Less than 183 days:• Income tax only applies to PRC-sourced income; and • Paid inside PRC or borne by the PRC FIEs.

Between 183 days and 1 “full” year:• Income tax only applies to PRC-sourced income; and• Paid inside PRC, borne by the PRC FIEs, or paid

overseas.

Length of Residence (cont’d)

General Rules (cont’d)

Between 1 “full” year but less than 5 consecutive “full” years:• Considered residents in PRC for tax purposes.• Subject to tax on all their salaries and wages (PRC-

sourced and non-PRC-sourced) paid inside PRC or borne by the PRC FIEs.

• Exemption only available for non-PRC-sourced salaries and wages paid overseas by foreign employer.

Length of Residence (cont’d):


1 “full” year and 5 consecutive “full” years or more previously without an intervening “breaking” year:

• Income tax on world-wide income.• No exemption available for non-PRC-sourced income

paid overseas.

“Break” year = a year in which an individual spends less than 183 days in PRC.For non-treaty countries, 90 days is used instead of 183 days.



5 consecutive “full” years in PRC:• If there is a “break” year subsequent to the five or more

consecutive “full” years, the five or more consecutive “full” years will no longer be counted, so that the counting of the “full” year begins again from the year immediately after the “break” year.



In connection with PRC-sourced income, the practice of PRC authorities is to allocate salary based on the time the individual spends inside and outside PRC in a given month (i.e. a “days-in/days-out” basis). • e.g. If an individual spends 20 days out of 30 days in a

given month inside PRC, then two thirds of his total wages and salaries will be treated as PRC- sourced and one third will be considered non-PRC-sourced.

Counting of days

For Purposes of the 183-day calculation• Only the days on which a non-resident is actually present in

China is counted• The day on which a non-resident leaves, enters, or makes

one or more entries counted as a whole day

For purposes of apportioning PRC-sourced and non-PRC-sourced income• The day on which a non-resident leaves, enters, or makes

one or more entries counted as half a day.

Non-Senior Management Expatriates Working in FIEs

1 “full” yr.

previously 1 “full”

years previously

Length of Residency PRC-Sourced Income = Days In Non-PRC-Sourced Income = Days Out

income paid by PRC employer orborne byestablishment in China of overseasemployer

income paid directly by overseas employer & not borne by an establishment in China

income paid by PRC employer or borne by establishment in China of overseasemployer

income paid directly by overseasemployer & not borne by an establishment in China

183* days183* days1 yr

5 consecutive “full” yrs

yr, 5consecutive “full”

without a subsequent “break” year

taxabletaxabletaxable

taxable

non-taxabletaxabletaxable

taxable

non-taxablenon-taxabletaxable

taxable

non-taxablenon-taxablenon-taxable

taxable

* 90 days for individuals from a non-treaty jurisdiction.

Senior Management Expatriates Working in FIEs

1 “full” yr.


years previously






183 days183* days1 yr





taxable

non-taxabletaxabletaxable

taxable


taxable

non-taxablenon-taxablenon-taxable

taxable

*If the expatriate is only a senior manager, not a director; and the provision regarding director’s fees in the doubt tax treaty signed

between China and the country of the expatriate’s origin does not explicitly apply to senior management, this table does not apply.

Expatriates Working In Representative Offices

1 “full” yr.


years previously






183* days183* days1 yr





taxable

taxable 1

taxabletaxable

taxable

non-taxablenon-taxabletaxable

taxable

non-taxablenon-taxabletaxable 1

taxable

* 90 days for individuals from a non-treaty jurisdiction.1 Taxable if representative offices uses deemed profit method for calculating enterprise income tax, or pays

no enterprise income tax due to not generating income.

Time Limits for Returns and Tax PaymentsIIT calculated and levied on monthly basis (withholding

agent or self-declared payer)

Submit tax returns within 7 days after end of month in question

May calculate IIT on an annual basis and make monthly provisional installment in advance if in “special industries” or “specific trades” final settlement made within 30 days after end of tax year

Time Limits for Returns and Tax Payments (cont’d)

File and pay tax at place where income is derived

Two or more income sources inside PRC, or source outside PRC may select place to file and pay tax

Income derived under two or more “categories” generally, compute and pay each “category” separately

Penalties

Surcharge on overdue tax at 0.05%, calculated daily from date obligation first arose; in addition may face:• RMB2,000 – RMB10,000 for failure to make timely tax

declaration/payment• Fine of 50% – 500% of unpaid tax/under-payment if

deemed to be evading tax• Fine up to RMB50,000 for fake tax calculating evidence

Expatriates working in the PRC

Dual Contract Arrangement

What is a Dual Contract Arrangement?• Two employment contracts – PRC Contract and

Overseas Contract• Requirement: separate and distinct job descriptions

under the two contracts• Benefit: Expatriates may continue to enjoy benefits

offered by Overseas Co, i.e. provident funds, medical insurance, employee stock option schemes, and IIT benefit in certain cases, etc.

Dual Contract Arrangement (cont’d)

Employment Implications• No problem for the Expatriates to obtain the

Employment Residence Permits• Employment relationships with the FIE are governed

by PRC Labor Law

Foreign Exchange Implications• None, if there is no money remittance between the FIE and

the Overseas Co in relation to the employment of the Expatriates, i.e. Overseas Co not receiving any reimbursement for salary paid under the Overseas Contract

• Problematic if remittance required


Applicable PRC Tax Legislation and Implications• The Expatriates’ IIT

– Depends on his / her length of stay in China and the source of income.

– Major tax advantage – if income paid by Overseas Co and not borne by FIE, the Expatriates can benefit from the Days in / Days out Rule

– Less useful if an Expatriate spends most of his / her time in the PRC


Applicable PRC Tax Legislation and Implications (cont’d)• The PRC FIE

– Income Tax Withholding and Reporting Obligations for salary paid For salary paid under Overseas Contract, same withholding and reporting obligations if the Expatriate is subject to PRC IIT


Applicable PRC Tax Legislation and Implications (cont’d)• Overseas Co

– No PRC issue for salary paid by Overseas Co to the Expatriates.

– If there is reimbursement by the PRC FIE to the Overseas Co, may have PRC Enterprise Income Tax and Business Tax consequences and foreign exchange consequences.

Secondment Arrangement

What is a Secondment Arrangement?• Overseas Co will second its employees to an FIE and then

charge the FIE for the secondment service provided • Expatriates may or may not have direct employment

relationships with the FIE• Expatriates may receive salaries in foreign exchange (paid by

overseas employer) and/or Renminbi (paid by FIE)• Benefit: Expatriates may continue to benefit from employment

with Overseas Co, i.e. provident funds, medical insurance, employee stock option schemes, and IIT benefit in certain cases.

Secondment Arrangement (cont’d)

Immigration and Labor Issues• Whether a local employment contract is necessary for

the purpose of getting Employment Certificate and Residence Permit depends on local practice.

• Shanghai and Suzhou: a secondment contract is sufficient for this purpose.

• Shenzhen: must have a local employment contract

Secondment Arrangement (cont’d)

PRC Tax Implications• The Expatriates’ IIT Obligations

– Expatriates’ IIT obligations are the same no matter whether they are directly paid by the FIE or by the Overseas Co: if income is borne by the FIE

• The FIE– Withholding and reporting obligations

• Overseas Co– payment by the FIE to the Overseas Co will likely be

subject to withholding tax on EIT and business tax

Director’s Fee

If the directors’ fees are received from a company resident in HK, they are wholly taxable in HK

Likewise, directors’ fees received from a company resident in the PRC are wholly taxable in the PRC

Different scenarios under which individuals perform cross-border

services

Examples 1

Facts:• HK resident• HK employment• Provide service in both HK and PRC• Compensation fully borne by HK entity• Stay in the PRC for no more than 183 days

HK tax implications• Fully taxable

PRC tax implications• exempt

Examples 2

Facts:• HK resident• HK employment and seconded to work in PRC• Provide service in both HK and PRC• Compensation borne by both HK and PRC entities• Stay in the PRC for no more than 183 days

HK tax implications• Fully taxable, but can apply for exemption on the part of income being taxed in

the PRC

PRC tax implications• only the part of income paid by PRC entity and related to services

rendered in the PRC taxable

Examples 3Facts:

• HK resident• HK employment and seconded to work in PRC

• Provide service in both HK and PRC• Compensation borne by both HK and PRC entities• Stay in the PRC for more than 183 days but less than 1 full year

HK tax implications• If visit HK for no more than 60 days, fully exempt; if more than 60 days,

need to report the entire income, but effectively, only the part related to HK services will be taxed in HK.

PRC tax implications• The part of income (both paid onshore and offshore) related to PRC

service taxable (days-in-days-out)

Examples 4

Facts:• HK resident• HK employment and seconded to work in PRC• Provide service only in PRC, come back to HK only for

weekends and holidays, or daily commute but only work in PRC

HK tax implications• Fully exempt

PRC tax implications• Fully taxable

Examples 5Facts:

• HK resident• HK employment and seconded to work in PRC• Provide service in both HK and PRC• Compensation borne by both HK and PRC entities• Stay in the PRC for more than 183 days but less than 1 full year (e.g. go to PRC to work from

Monday to Thursday, come back to HK to work on Friday and stay over the weekend)

HK tax implications• need to report the entire income, but effectively, only the part related to HK services

(4/7) will be taxed in HK.

PRC tax implications• The part of income (both paid onshore and offshore) related to PRC service taxable (days-in-

days-out).• E.g. if Monday morning goes to PRC, Thursday night comes back to HK, 3/7 of income will be

taxable in PRC.

Examples 6Facts:

• HK resident• HK employment and seconded to work in PRC

• Provide service in both HK and PRC

• Compensation borne by both HK and PRC entities• Stay in the PRC for 1 full year but not 5 consecutive full years

HK tax implications• Only the part related to HK services will be taxed in HK.

PRC tax implications• Fully taxable except the part of income paid by HK entity and related

to services rendered in HK

Examples 7

Facts:• HK resident• HK employment and seconded to work in PRC• Provide service in both HK and PRC• Compensation borne by both HK and PRC entities• Stay in the PRC for 1 full year and has 5 consecutive previous full years

HK tax implications• Only the part related to HK services will be taxed in HK.


Examples 8

Facts:• HK resident• PRC employment• Provide service on behalf of PRC entity in both HK and PRC• Stay in the PRC for more than 183 days but less than 1 full year

HK tax implications• Only the part related to HK service taxable

PRC tax implications• The part of income related to PRC service taxable (days-in-days-

out)

Examples 9

Facts:• HK resident

• PRC employment

• Provide service only in PRC

• Compensation fully borne by PRC entity

• Stay in HK only for weekends and holidays

HK tax implications• not taxable

PRC tax implications• fully taxable

Examples 10

Facts:• HK resident• PRC employment• Provide service only in HK• Stay in the PRC for no more than 183 days

HK tax implications• fully taxable

PRC tax implications• Exempt (but practice may vary depend on location, e.g. Beijing

will tax the part of compensation borne by the PRC entity)

Examples 11

Facts:• PRC resident• Provide services in both HK and PRC• Stay in HK for no more than 183 days• Compensation not paid or borne by HK entity

HK tax implications• Exempt


Examples 12

Facts:• PRC resident• Provide service in both HK and PRC• Stay in HK for more than 183 days

HK tax implications• Income related to HK services taxable

PRC tax implications• Fully taxable, but can claim a credit for tax paid in HK

Typical scenarios for Hong Kong companies doing business in the

PRC

Profits Tax

Hong Kong

Scope• Source rule

Rate• Fixed 16%

PRC

Scope• Residence rule

• Source rule

Rate• 33%, 27%, 24%, 15%

– Changes according to location and industry

• Tax holiday

Enterprise Income Tax

Foreign Investment Enterprises (“FIEs”)

• Tax on worldwide income at flat rate of 30%, plus a local surtax of 3%: effective tax rate 33%

• Reduced tax rates of 24% and 15% in special zones such as Open Coastal Economic Zones and Special Economic Zones

EIT incentives• Reduced base EIT rate

– Standard EIT rate: 33% (national: 30% and local: 3%)– May be lowered to 24% or 15%

• Tax holiday for production enterprises– Tax exemption (e.g. two year from first profit-making

year)– Tax reduction (e.g. 50% reduction for three years

following tax exemption)

VAT incentives• Exemption of import-stage VAT upon import of

equipment

Business tax incentives• Exemption for technology transfer or technology

development

Various technology-related entities qualifying for tax incentives:• IC Design Enterprise• IC Enterprise• Software Enterprise• High and New Technology Enterprise (“HNTE”)• Technology Intensive and Knowledge Intensive

Enterprise (“Two-Intensives Enterprise” or “TIE”)• Technologically Advanced Enterprise (“TAE”)• R&D Center

Business Tax

What is Business Tax?

Tax rate vary between 3% - 20%

Business tax levied on:• Taxable labor services;• Assignment of intangible assets; or• Sale of immovable property.

VALUE ADDED TAX

What are the taxable activities?

• Sales of goods in China;

• Import of goods into China;

• Performance of processing or repair and replacement services in China.

Tax rates

17%• sale or importation of most goods and domestic sale of

taxable labor services;

13%• certain goods e.g. cereals, edible and vegetable oil, tap

water, central heating, coal gas, books, newspapers, chemical fertilizers, etc.;

How is VAT calculated?

The seller of taxable goods or services collects the VAT on behalf of the tax authorities from purchasers. If the seller is an Ordinary Taxpayer it can deduct the amount of VAT paid on its inputs before payment to the tax authorities.• VAT payable = Output tax collected during the period –

input tax paid during the period where:– Output tax = sales value x applicable VAT rate– Input tax = purchase value x applicable VAT rate

Imports

VAT applicable for imports:

VAT payable = tax rate x (dutiable value + customs duty + Consumption Tax).

No amounts can be deducted or offset at import stage.

QUESTION TIME

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港人內地投資稅網錦囊