There have been changes to capital rules and tweaks to China's rules for expatriate tax and inclusions. Here are expert tips on mistakes to avoid.
Much like a season-ending cliffhanger, worries around whether the Chinese government will extend the exemption on foreign earned income for expatriates recur without fail.
So, we need to discuss the changes in personal and business tax rules in China. We organized a chat with our good friend, Borys Priadko. Despite the name, Borys is very much a Sydney born Aussie who has lived Shanghai for a couple of decades now. Borys is a CPA and the Shanghai based principal of Xing Sen Shanghai Management Consulting Ltd.
Owen Caterer: Morning Borys, how are things in Shanghai now.
Borys Priadko: Fantastic. Great. One of the best times of the year. It’s finally starting to warm up yet we haven’t yet arrived in pollen season yet.
Owen: Ah, the pollen season for those Plane trees downtown is enough to make your eyes water.
Borys: It sure does.
Owen: Another thing that brings tears to expats based in China is the fear that the foreign income tax exemption might disappear. But it seems we have salvation again.
Borys: Yup, the foreign tax exemption was due to expire December 31, 2023 but it has been extended again until 2027. The government is working hard to be attractive to foreigners and foreign investment. But keep in mind that you need to pick between two options.
Owen: Which one is better?
Borys: That depends. (Smiles). But it boils down to benefits-in-kind provided by the company or the self-claimed. Keep in mind that the tax deduction amounts however won’t get close to covering actual expenses. For example, for education it is 2,000 RMB per child per month. I can’t think of a kindergarten or international school that is even close. Keep in mind that this is for non-China domiciled tax resident foreigners. The six-year rule is key for this.
Owen: I think that is the key rule for expats in China generally, isn’t it?
Borys: For many expats it is. Essentially, if you don’t have a domicile in China you don’t need to pay global tax. This exemption lasts for six years and can be reset by leaving China for more than 33 days. Don’t forget the day you leave and the day you return are considered in China. So always do 33 days, just to be sure. Or you can reset the clock by doing 90 days cumulatively in a year.
This exemption lasts for six years and can be reset by leaving China for more than 33 days. Don't forget the day you leave and the day you return are considered being "in China". So always do 33 days, just to be sure. Alternatively, you can reset the clock by doing 90 days cumulatively in a year.
Owen: Ah, the mythical tax holiday. It’s always worth keeping in mind. Is it easy to prove non-domicile?
Borys: Although I haven’t heard of crackdowns, it also wouldn’t shock me. The law is a little vague here. Factors it considers are where you have property, ties, family and other things like Permanent Residency (PR).
Owen: Gaining PR seems popular, but are you saying it can make you tax resident?
Borys: Becoming PR, by itself, is not a golden test for residency. Yet, it could be a real factor in the overall decision on whether you are resident and therefore liable for tax on global income, including overseas investments.
Becoming PR, by itself, is not a gold test for residency. Yet, it COULD be a real factor in the overall decision on whether you are a resident and therefore liable for tax on global income, including overseas investments.
Owen: That certainly seems like something some expatriates might wish to avoid.
Borys: In some situations, certainly.
Owen: We have also seen a lot of noise recently that registered capital must be contributed to a business. Can you explain what is happening there? I have several friends and clients who are business owners where this has raised eyebrows.
Borys: For those who don’t know, Chinese companies, whether foreign or local, are required to nominate a level of capital they will invest. This amount appears on their business license. It can be very influential for some businesspeople on who to partner with in doing business so it is important. It’s hard to pretend you are a large successful company if you only have registered capital of 500K RMB.
Owen: I heard that companies could pick their timeframe to add this capital. Some smaller companies and entrepreneurs never got around to it. Correct?
Borys: That’s true. The government is tightening the rules. Yet there are still ways to manage this from a cash flow perspective. You can put the money in progressively over time and it can and should be used as part of normal running costs of the business after it is correctly injected and recorded to ensure tax free compliance on those funds. There are rules to comply with but to an extent you can cycle capital into and out of the business to cumulatively meet the capital requirements. It is best to talk to your company agent to ensure you meet this requirement.
Owen: Can you adjust the amount of registered capital?
Borys: Absolutely. It is a process. Business owners and managers also need to consider the impact on your business. Some companies should have larger amounts. But it probably less vital for marketing agencies and consultants than it is for large factories in the industrial area.
Owen: Underestimating the paperwork can be an issue for foreign investors. What’s another common mistake foreign investors make when opening companies in China.
Borys: How to manage the absolute control that a CEO can have when all the business chops and approvals reside with them. We’ve seen many situations where a trusted CEO has run off with a few million dollars in company money, never to be seen again. It happens more often than you’d think because most companies are keen to keep those stories quiet.
Mitigating that risk can be as simple as getting an outside financial advisory to hold some of the chops. This means oversight on major transfers. That’s a service many family and large companies find useful.
Owen: I think someone said “Trust but verify.” That sounds appropriate here.
Borys: Exactly.
About Borys Priadko
Borys Priadko has almost 20 years of experience in accounting, finance, business administration and management in Shanghai China. He is the owner of Shanghai Xin Sen Management Consulting Co., Ltd., an international accounting firm, since August 2009.
Borys previously worked for Lehman Brown in Shanghai as a senior manager. He has also worked in senior management and CFO roles in Australia for almost 3 decades with various companies including ERG Limited, Siemens Building Technologies, Staefa Control Systems, Lowe Group of Companies, Nautilus Trading Company, Castrol Australia, and Guildford Australia. He received a Bachelor Degree in Financial Administration from the University of New England in 1979, and his CPA from Sydney NSW Australia in 1985.
About Xing Sen Shanghai Management Consulting
Xing Sen Shanghai Management Consulting provide financial, tax and corporate operations advisory to corporations and individual investors looking to enter or who are already working in China. We guide companies and individuals through China’s complex and frequently changing regulatory environment and assist them with all aspects of establishing, maintaining and operating their business operations in China.
We have more than 15 years of on-the-ground experience and over 40 years of commercial experience. Through a strong reliable partner network of International and local accountants, lawyers, tax experts, auditors, technical consultants and researchers we will be your reliable partner for your China business.
Caterer Goodman Partners and Borys Priadko and Xing Sen Shanghai
Caterer Goodman Partners is a US registered investment advisor specializing in expatriates based in Asia.
Caterer Goodman Partners (CGP) does not have any kind of relationship with Borys Priadko or Xing Sen Shanghai Management Consulting. This information is purely general and does not constitute professional advice. This article should not be seen as an endorsement of a particular advisor or guarantee of any company or companies. Investors, both private and corporate, should consider all advice and disclosure documents before making any business or investment decisions.