1.      Connotation for Senior Executives.

It is quite clear about connotation of Board Directors on practice, namely Board Directors is referred to the members of Board of Directors, which participates in major decision-making, also implements and supervises those strategies. In particular, there are different definitions for senior management staff. Regarding definition and scope of “senior management staff”, Guo Shui Han `1995` No 125 indicates senior management positions of companies in China as principal, deputy (general) managers, with functions of chief expert, commissioner and other similar management and supervisor duties.

   

2.      Guo Shui Han `2007` regulation No 946

 

According to the document of regulations (Guo Shui Han `2007` N946) 《State Administration of Taxation approval of personal income tax calculation formula for non-residence Board members and Senior management positions internal holders》non-residence individuals on Board member or Senior management positions in China (hereinafter senior management ), at the same time working on part-time position in China and abroad, entire monthly remuneration collected inside or outside of China reasonably cannot belong to domestic or abroad remuneration for work, should be distinguished according to the following formulas for individual income tax payable calculation.  

 

1.      Non Tax Agreement (CEPA) applicable for senior management with less than 90 days of continuously or accumulative period of residence in China of annual taxable period or based on Tax Agreement (CEPA) regulations should be identified as the fiscal resident of the other agreement party, however applicable for the Board members fees for corporate senior management in China of Tax Agreement (CEPA) regulations, with less than 183 days of continuous or accumulative period of residence in China, the following formula for calculation is applicable:

 

Tax payable = (monthly taxable incomes paid inside and outside × Applicable tax rate - quick deduction) × monthly incomes paid inside ÷monthly incomes paid inside and outside

 

2.      Non Tax Agreement (CEPA) applies or based on Tax Agreement (CEPA) regulations should be identified as the fiscal resident of China for senior management , with continuous or accumulative period of residence in China for more than 90 days, but according to 《Notification on calculation issues for non residence individuals living in China for 5 years by State Administration of Taxation, Ministry of Finance》(Cai Shui Zi `1995` N 98) relevant regulations, for less than 5 years of continuous residence in China applies the following formula:

 

Tax payable = (monthly taxable incomes paid inside and outside × Applicable tax rate - quick deduction) × `1 - (monthly incomes paid outside ÷monthly incomes paid inside and outside) × (number of days abroad at that month ÷ days in the month)`

 

3.      According to provisions of Tax Agreement (CEPA) should be identified as the fiscal residents of the other agreement party for senior management, however applicable for the Board member fees for corporate senior management in China of Tax Agreement regulation for more than 183 days of continuous or accumulative period of residence in China, the following formula for calculation is applicable:

 

Tax payable = (monthly taxable incomes paid inside and outside × Applicable tax rate - quick deduction) × `1 - (monthly incomes paid outside ÷monthly incomes paid inside and outside) × (number of days abroad at that month ÷ days in the month)`

 

4.      Non Tax Agreement (CEPA) applies or based on Tax Agreement (CEPA) regulations should be identified as the fiscal resident of China for senior management, according to Cai Shui Zi `1995` N 098 and relevant constitute provisions, if have been resident continuously in China for 5 taxable years and still re-reside in China for one year, should calculate individual income tax based on wages and salaries according to the following formula:

 

Tax payable = monthly taxable incomes paid inside and outside × Applicable tax rate - quick deduction

 

No matter whether it is applicable or not for Tax Agreement, based on Cai Shui Zi `1995` N 098 and relevant constitute provisions, if individual has been resident continuously in China for 5 taxable years and still re-reside in China for one year, overall taxation obligations should be performed, i.e. income tax declaration for total amount of inside and outside incomes should be applied in China.  Therefore, for better understanding of those formulas, we prepared two examples below:

 

Example 1

Mr. X is a Hong Kong resident, working in Hong Kong A Company. Hong Kong A Company established B Company in Mainland China where Mr. X is at the same time holds position of CEO. Total amount of working period in Mainland China in 2011 is 150 day, with monthly salary received from Hong Kong A Company 20,160 RMB and 8,000 RMB received from Chinese B Company. The number of days spent in Mainland China in September is 7 day. Let’s calculate individual income tax to be paid in China by Mr. X

Answer: According to Chinese and Hong Kong regulations of Tax Agreement (CEPA), Mr. X’s residence in Mainland China in 2011 is approximately 150 days, which are less than 183 days; therefore individual income tax should be calculated by the following formula:

 

Tax payable = (monthly taxable incomes paid inside and outside × Applicable tax rate - quick deduction) × monthly incomes paid inside ÷monthly incomes paid inside and outside

=`（20160+8000-4800）×25%-1005`×8000/（20160+8000）= 1373.58 RMB。

 

Example 2

Mr. Y is a foreign resident working in foreign invested company in China as finance supervisor and Board director. At the same time he holds position in Head Quarter of this company abroad, having Tax Agreement (CEPA) between that country and China. In 2011 working period in China is 200 days with monthly salary received 80,000 RMB where 30,000 RMB is paid by foreign invested company in China and the other 50,000 RMB is paid by foreign HQ. In September Mister Y spent 20 days in China, how much of individual income tax should be paid in September?

 

Answer: Due to regulations of Tax Agreement between foreign countries and China, moreover period of days that has been spent in China by Mr. Y exceeds 183 days, then individual income tax should be calculated by the following formula:

 

Tax payable = (monthly taxable incomes paid inside and outside × Applicable tax rate - quick deduction) × `1 - (monthly incomes paid outside ÷monthly incomes paid inside and outside) × (number of days abroad at that month ÷ days in the month)`

=`（50000+30000-4800）×35%-6375`×（1-50000/80000×10/30）=15789.79 RMB

 

3. Current tax-free incomes for expatriates

 

Based on regulation《Notification regarding individual income tax certain policies issues by State Administration of Taxation, Ministry of Finance》it is temporary exempted from individual income tax for the following incomes:

 

(1) Obtained by foreign individuals in non-cash form or on an actual reimbursement basis for housing allowance, food allowance, relocation expenses or laundry expenses.

 

(2) Obtained by foreign individuals domestic and abroad business trips allowance

 

(3) Obtained by foreign individuals leave allowance, language training expenses, expenses for children education etc. and other rational parts examined and approved by local tax authorities.

 

(4) Obtained by foreign individuals dividend income from foreign invested company  B-shares or overseas shares, dividend income (dividends).

 

(5) Foreign professionals who meet the requirements below exempt from individual income tax on obtained salary and wages income:

 

①Based on World Bank special loan agreement, foreign experts directly dispatched to work in China.

②Experts directly dispatched to work in China by United Nations

③Experts of the United Nations arrived to assist in project with China

④Experts dispatched by assisting country in China to assist in particular project.

⑤ Based on culture exchange projects signed between the government of two countries, the other country is responsible for salary and wages income of arrived to work in China for within 2 years experts in culture education.

⑥ Based on Chinese High School international exchange projects, other country is responsible for salary and wages income of arrived to work in China for within 2 years experts in cultural education.

⑦Experts arrived to work in China through non-governmental research protocol, and then government authorities of its country are in charge of salary and wages income.

 

(6) Individuals who received an award due to assistance in investigation of different kinds of illegal or criminal activity.

 

(7) Individuals withholding payment formalities, made deduction of fees according to regulations.

 

(8) Individual transfer for personal use for more than 5 years, moreover obtained income is only used for a family living housing.

 

(9) For individuals who reached retirement, retirement age, but due to operational requirements prolong extension of retirees for senior experts (refers to experts, scholars to enjoy special allowance from the government), their salary income as long as retired wages in extension of retirees period are not taxable for individual income tax.

 

(10) Individuals who purchased welfare lottery ticket, sports lottery ticket and won a prize in amount less than 10,000 RMB (included) are temporary exempted from individual income tax, if it’s more that 10,000 RMB individual income taxes should be levied.

 

(11) China blood related retired foreign intellectuals arrived to settle in China and appointed on position of technology adviser, each month income of issued allowance exempt individual income taxation.

 

4. Planning of individual income tax for foreign Board members and executives.

 

(1) Legitimate control of working and living time in China.

 

According to Guo Shui Fa `1994` No. 148 cultural policies and regulations, we can sort out the following meanings:

 

1.      Non Chinese residence individuals who hold Board member or senior executive positions in Chinese company, at the same time hold part-time position abroad, no matter how long is the period for foreigner to stay in China, obtained salary and wages income paid in China `Regardless of income derived from the sources inside of China or not` are applicablefor individual income taxes. 

2.      Non Chinese residence individuals who hold Board member or senior executive positions in Chinese company, at the same time hold part-time position abroad, should define the following method of taxation for obtained salary and wages income inside and outside China based on Shui Fa `1994` No. 148 second clause, third clause, fourth clause provisions for tax payment obligations, i.e.:

 

（1）     An individual within one taxable year residing in China continuous or accumulative less than 90 days or those from Tax-Agreement countries residing in China continuous or accumulative less than 183 days needn’t pay individual income tax on their incomes paid and derived from employers outside of China.

（2）     An individual within one taxable year residing in China continuous or accumulative more than 90 days or those from Tax-Agreement countries residing in China continuous or accumulative more than 183 days but less than one yearshall pay his individual income tax on his income paid by employers both inside and outside of China during his service in China.

（3）     If an individual within one taxable year resides in China for one year, the taxable method for his income paid outside of China is as same as (2) i.e. he shall pay his individual income tax on his income paid by employers outside of China during his service in China. Only if an individual resides in China for 5 years, he shall pay his individual income tax on income derived from sources both inside and outside of China started from the 6th year. 

 

 

Defined by the table below:

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		Paid in China and source in China	Paid in abroad and source in China	Paid in China and source in abroad	Paid in abroad and source in abroad
Less than 90 day or 183 days	General employee	Levied	Not levied	Not levied	Not levied
	Senior executive management	Levied	Not levied	Levied	Not levied
More than 90 days or 183 days but less than one year	General employee	Levied	Levied	Not levied	Not levied
	Senior executive management	Levied	Levied	Levied	Not levied
At least 1 year but less than 5 years	All employees	Levied	Levied	Levied	Not levied
More than 5 years	All employees	Levied	Levied