Pack a bag, kiss your loved ones goodbye, catch a flight outta here! If you're a long term expat in China who isn't living hand to mouth off an English teaching gig, you need to pay attention to the 5 year rule for personal tax. There are various websites offering great explanations as to the rule which can be found at one, two and three.
If those three websites do a much better job than I can of explaining this rule, then why bother posting about it?
Well, there are a few things that you need to take note of. Firstly, it's really important to understand that this rule isn't something new but it is only fairly recently that it's managed to trickle down onto a host of Finance websites and expat blogs. If you do a quick google search you'll see that most half-decent write up's appear after 2016. Information is something that China handles carefully. Would it be far fetched to assume that this sudden release of information isn't just coincidental?
At the moment, the rule essentially means that you need to leave China for 31 days within a 5 year period. If you don't leave for at least 31 days in one year (January 1st to December 31st) then you will be liable for tax on your world wide income. If you do do manage to leave you'll benefit from a 'tax break' whereby you don't become a tax resident in China.
Ideally, it's best to leave within your first 5 year period in order to reset your clock. However, if you don't manage to leave for 31 days within that 5 years then you can reset your clock yearly by leaving once a year for 31 days. The more extreme option would be to leave China for a full year and then come back again to completely reset your clock. They apparently also allow 90 days inside China within that year 'away'.
Why am I saying 31 days instead of 30? The rule actually states "over 30 days" so if you're just leaving for 30 days then don't bother. If you leave for a cumulative total of 90 days then you need to find a way to add that one more day.
I have also found out that it doesn't matter what you're doing in China (a student, employee etc) or if you're still a tax resident of another country for part of the 5 year period. Once you are physically in China, the clock starts ticking.
The more worrying point to consider is that this sudden interest in foreign expatriates global tax affairs isn't just by a few financial websites. China recently signed up to the "OCED Tax Information Exchange" which means they potentially have access to individuals global financial information from over 50 countries. Access will begin in September 2018 (full list here). We can't be sure what kind of information they have but if you've been living in China for over 5 years and have income generating assets overseas then you need to look carefully at your financial situation.
In the past when I've broached this topic, a few other, even longer term expats have said to me "How are they going to know?" . Well, it looks like they have their answer. Now you might be asking "Why would they look into me?" if you're just a normal guy teaching or working in a mid-level job. The issue for me is that it isn't important if they look into you or not. The point is that if you're aware of the tax rules in China (and likely even if you're not aware!) and the Chinese tax authorities find out about your undeclared Global income, then they likely aren't going to be too sympathetic. You could be looking at a big fine, deportation or even jail time (you never know) for tax fraud or evasion.
The third link I've posted above is the only website I've found that mentions the ability to "reset your clock" in China as being a "tax break". If this article is correct in that the break isn't a rule at all then I can definitely imagine China removing this 'perk' completely in the future.
It's time to look at your global financial situation and take note. If you've already been in China for over 5 years without that precious reset, look at what you earned last year and calculate 20%. That's what you're liable to pay in tax.
You might just have the excuse you've been looking for to take that extended break.
If those three websites do a much better job than I can of explaining this rule, then why bother posting about it?
Well, there are a few things that you need to take note of. Firstly, it's really important to understand that this rule isn't something new but it is only fairly recently that it's managed to trickle down onto a host of Finance websites and expat blogs. If you do a quick google search you'll see that most half-decent write up's appear after 2016. Information is something that China handles carefully. Would it be far fetched to assume that this sudden release of information isn't just coincidental?
At the moment, the rule essentially means that you need to leave China for 31 days within a 5 year period. If you don't leave for at least 31 days in one year (January 1st to December 31st) then you will be liable for tax on your world wide income. If you do do manage to leave you'll benefit from a 'tax break' whereby you don't become a tax resident in China.
Ideally, it's best to leave within your first 5 year period in order to reset your clock. However, if you don't manage to leave for 31 days within that 5 years then you can reset your clock yearly by leaving once a year for 31 days. The more extreme option would be to leave China for a full year and then come back again to completely reset your clock. They apparently also allow 90 days inside China within that year 'away'.
Why am I saying 31 days instead of 30? The rule actually states "over 30 days" so if you're just leaving for 30 days then don't bother. If you leave for a cumulative total of 90 days then you need to find a way to add that one more day.
I have also found out that it doesn't matter what you're doing in China (a student, employee etc) or if you're still a tax resident of another country for part of the 5 year period. Once you are physically in China, the clock starts ticking.
The more worrying point to consider is that this sudden interest in foreign expatriates global tax affairs isn't just by a few financial websites. China recently signed up to the "OCED Tax Information Exchange" which means they potentially have access to individuals global financial information from over 50 countries. Access will begin in September 2018 (full list here). We can't be sure what kind of information they have but if you've been living in China for over 5 years and have income generating assets overseas then you need to look carefully at your financial situation.
In the past when I've broached this topic, a few other, even longer term expats have said to me "How are they going to know?" . Well, it looks like they have their answer. Now you might be asking "Why would they look into me?" if you're just a normal guy teaching or working in a mid-level job. The issue for me is that it isn't important if they look into you or not. The point is that if you're aware of the tax rules in China (and likely even if you're not aware!) and the Chinese tax authorities find out about your undeclared Global income, then they likely aren't going to be too sympathetic. You could be looking at a big fine, deportation or even jail time (you never know) for tax fraud or evasion.
The third link I've posted above is the only website I've found that mentions the ability to "reset your clock" in China as being a "tax break". If this article is correct in that the break isn't a rule at all then I can definitely imagine China removing this 'perk' completely in the future.
It's time to look at your global financial situation and take note. If you've already been in China for over 5 years without that precious reset, look at what you earned last year and calculate 20%. That's what you're liable to pay in tax.
You might just have the excuse you've been looking for to take that extended break.
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