Not only can tax treaties effectively eliminate double taxation for individuals, they can provide more preferential tax treatment than domestic law. Today, I would like to share with you some of the tax treaty benefits that individuals can enjoy, please check it out!
What is a tax treaty?
A tax treaty is an agreement signed by two countries or regions with tax jurisdiction to avoid double taxation and prevent tax evasion. Tax treaties mainly involve corporate income tax and individual income tax.
China has brought 103 tax treaties and agreements into effect by December 31 2019. Tax treaties can help cross border taxpayers enjoy preferential treatment of tax reduction or exemption and settle cross border tax disputes, that’s why they are called “talismans” for taxpayers engaging in cross border operations.
What tax treaty benefits can individuals enjoy?
Whether a resident individual obtains income derived from abroad, or a non-resident individual obtains income derived from China, as long as the conditions stipulated in the tax treaty are met, corresponding preferential treatments can be enjoyed. Here are some common ones:
Tax exemption on income from employment
Wages and salaries paid by overseas employers that meet the conditions of the tax treaty are eligible for individual income tax exemption.
For example, a German company appoints its employee Mr. Hans to provide equipment installation and commissioning services in China for a period of 100 days. The German company has no permanent establishment in China. Mr. Hans is a German tax resident and his salary is borne and paid by the German company. Mr. Hans has a tax liability in China under Chinese domestic tax law, while according to the Sino-German tax treaty, the payment obtained from the German company during his work in China for less than 183 days is exempt from tax in China.
On the other hand, Chinese tax residents who are dispatched to work in Germany can also enjoy individual income tax exemption in Germany under the conditions of the tax treaty.
Tax exemption for certain teaching and research activities of teachers and researchers
The remuneration obtained by teachers or researchers from teaching or research activities abroad can enjoy tax exemption for overseas individual income tax if eligible.
For example, a university in China hires Mr. Smith, an American professor to teach full-time in China, and pays his salary. The contract period is from January 1, 2019 to December 31, 2021.Mr. Smith is a U.S. tax resident. He has never been in China before and will return to the United States upon the termination of the contract. Professor Smith has obtained wages and salaries derived from China, and he has tax liability in China as per the law. However, the remuneration obtained for teaching within 3 years from his first day in China is exempt from tax in China in accordance with the Sino-U.S. tax treaty.
Likewise, Chinese professors hired by American universities to conduct teaching or research activities in the United States can enjoy individual income tax exemption in America as well.
Tax exemption on capital gains
Individuals that obtain capital gains by the transfer of property (including equity, real estate, etc.) from overseas are exempt from overseas individual income tax if eligible.
For example, Mr. Tanaka, a Japanese tax resident, holds a 20% stake in a Chinese company with no immovable property in China. If Mr. Tanaka sells the company's equity, his income from the transfer after deducting the original value of the equity and reasonable expenses shall be taxed at a rate of 20% as required by China’s tax law, but it is exempt from tax in China subject to the China-Japan tax treaty.
On the other hand, if Chinese resident individuals sell Japanese companies’ equity, those who qualify can also enjoy individual income tax exemption in Japan.
Tax reduction on dividends, interest and royalties
Individuals who obtain dividends, interest, and royalties from overseas can enjoy tax deductions for overseas individual income tax if eligible.
For example, Mr. Brown, a British tax resident, licenses a patent to a Chinese company for its use and receives royalties of ￥120,000 （VAT not included）. On the basis of China's tax law, individual income tax should be ￥28040(120000*(1-20%)*45%-15160), whose effective tax rate would be more than 20%. However, based on the Sino-British tax treaty, the tax shall not exceed 10% of the gross amount of the royalties.
Similarly, if Chinese tax resident individuals obtain royalties from the United Kingdom for authorizing copyrights, patents and so on, those who meet the conditions of the tax treaty only need to pay individual income tax no more than 10% of the total royalties in the United Kingdom.
What procedures are required for individuals to enjoy the benefits of tax treaties?
As to Chinese residents, they can apply to the county-level tax authorities in charge of income tax to issue a "Certificate of Chinese Fiscal Resident", and apply for tax preferential treatment of the tax agreement according to the requirements of the host country or region. For the materials and procedures required to issue this certificate, please refer to the Announcement No. 40 of 2016 and Announcement No. 17 of 2019of the State Taxation Administration of China.
For non-residents, if they intend to enjoy the treaty benefits, they should first fill in the "Information Reporting Form for Non-resident Taxpayers Claiming Treaty Benefits" and submit it to the withholding agent. Second, relevant information should be kept for future reference, which mainly includes:
a. Certificate of tax resident status issued by the tax authority of the host.
b. Proof of ownership such as contracts or agreements.
For specific requirements, please refer to Announcement No. 35 of 2019 issued by the State Taxation Administration of China.