Discussions here and in The New York Times have examined the Chinese government's recent efforts to squeeze more revenue out of its income tax system, especially from overseas activities. For businesses, cross-border investment structures are being more closely monitored to determine whether they constitute illegal tax shelters. An antiavoidance rule announced in December 2014 seeks to crack down on empty shell companies based in tax havens. For individuals, much attention is being paid to whether China's tax net can reach foreign assets and earnings, and if so, under what conditions.
An excellent new article by Tax Analysts' Stephanie Soong Johnston focuses on the latter issue. In particular, the article looks at whether China plans to mimic the United States by adopting a system of citizenship-based taxation. After detailed conversations with a variety of sources, Johnston concludes that that is not the case. In the process, she reviews the concept of zhusuo in Chinese tax law, which is critical in determining jurisdictional claims.
Individuals with zhusuo (domicile or habitual abode) in China are taxable on their worldwide income, both foreign and domestic. That is also the rule for individuals who lack zhusuo but have resided in China for a year or more. Individuals lacking zhusuo who reside outside China (or who lack zhusuo and reside in China for less than a year) are taxable only on their Chinese-source income. This approach is in keeping with international norms, and it is conceptually distinct from taxation based on citizenship or nationality.
There are bound to be gray areas about whether Chinese nationals have abandoned zhusuo when relocating abroad for work, and Chinese tax authorities will, no doubt, carefully scrutinize this issue. Without considering the details, it would be imprudent to assume that such a person's foreign salary is necessarily exempt from Chinese taxation. But that inquiry is more about the breadth of the domicile concept and less about taxing citizenship.
Pieter de Ridder, a tax partner with Mayer Brown, told Johnston the treatment of a Chinese national working overseas could likely depend on whether his stay outside the country is considered temporary. That determination is heavily influenced by the taxpayer's unique circumstances. Did they “deregister” with municipal authorities when they left China? Did their families join them overseas? Did they maintain Chinese bank accounts after relocation? In the next two years, de Ridder expects China's State Administration on Taxation (SAT) to clarify the difference between temporary and non-temporary stays abroad.
De Ridder added that China's tax treaty network overrides Chinese domestic law, meaning a taxpayer's status might be influenced by whether the new country in which they've established tax residence is a treaty partner.
Johnston also spoke with Lili Zheng of Deloitte, Wei Cui of the University of British Columbia, Bernard Schneider of Queen Mary University in London, Jinyan Li of York University in Toronto, and Keith Bradsher, the New York Times Hong Kong bureau chief whose January 7 article touched off the discussion. Bradsher emphasizes that the SAT is serious about chasing down domestic taxpayers with undeclared foreign assets, and that foreign salaries paid to Chinese citizens may indeed fall under the scope of China's individual income tax, depending on the particulars.
The definitive statement on the matter comes from Beijing. On January 9 the state-operated China Daily responded directly to the New York Times article as follows: "China is gradually broadening its tax base, and is interested in including citizens' overseas income in the scope of taxation, which the foreign media describe as an imitation of the United States ... [but] at present China does not have any concrete measures to tax citizens' overseas income." (Translation courtesy of the Isaac Brook Society.)
If in doubt, know your zhusuo.