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Taxation of wages for employment dispatches to China
by Frank Dissen
Tax law in China
In essence, natural persons with a residency in China (residents) are indefinitely taxable for their global income in China. Dispatched foreign employees are also considered residents if they spend at least one entire fiscal year (=calendar year) in China. Natural persons who spend less than one fiscal year in China are considered non-residents and are conditionally taxable.
For a stay in China between one and five years, residents may request to only pay taxes on income from sources within China or income paid solely by a Chinese company. However, the global income principle applies once more for dispatched employees for a stay of more than five years in China.
Non-residents who live in China between 90 days and less than a year within a calendar year need only pay taxes on income from Chinese sources. With a sojourn of less than 90 days per calendar year, only that income that is economically paid by a Chinese company is taxable.
Double taxation agreement between China and Germany
There exists a double taxation agreement between Germany and China, which determines rights to taxation on income from non-freelance labor. This DTA comes into play when the taxpayer is a resident in one or both contract countries. The DTA is ruled out upon declaring fiscal residence in Germany and non-resident status in China. However, should residency in both countries be declared (through fiscal residency in Germany and a residency in China longer than a year), residency in the country with the taxpayer's primary home or focal point of vital interests (so-called "tie-breaker rule" in Art. 4 para. 2 DTA D-CN) is considered the primary residence.
Essentially, the employing country initially has taxation right on the income from this employment (Art. 15 I DTA D-CN). Upon entry into force of exemption regulation (so-called 183-day rule), the calendar year must be considered so that deviation from the aforementioned 90 days must be considered for each 183 days. For residency in China by a non-resident of more than 183 days and less than one year in the calendar year, only income from Chinese sources is taxable. With a residency of less than 183 days, only income paid by a Chinese company is taxable in China. Should the costs be paid by or for an employer not residing in China, the right to taxation of this income from such employment falls to the country of residence (Art. 15 II DTA D-CN).
New double taxation agreement signed in 2014
On 03.28.2014 the new Double Taxation Agreement (DTA) between China and Germany was signed, but has not yet come into effect. The required ratification and exchange of documentation (notification) has yet to occur. The DTA will then come into effect 30 days after receipt of the last notification.
An alteration arises for the taxation laws of the employing state regarding income from employment, as with a sojourn of more than 183 days, then a 12-month period is assigned in place of the former calendar year.
The exemption method continues to apply. However, the activity clause will be enhanced with a remark in the German Foreign Transaction Tax Act (AStG). An exemption is then only possible for "active" employment in the employing country and/or subsidiary as per AStG. Otherwise, merely an abatement of the tax paid in China may be made.