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港 人 內 地 投 資 稅 網 錦 囊

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  1. 港 人 內 地 投 資 稅 網 錦 囊 PRC Tax Issues Frequently Faced by Hong Kong Citizens in the PRC Simon Lam

  2. Comparison Between HK & PRC Tax • Types of Taxes • Tax agreement between HK & PRC

  3. Types of Taxes – Hong Kong • Direct Tax • Profits Tax • Salaries Tax • Property Tax • Indirect Tax • Stamp duty • Alcohol Tax • Airport Tax • Vehicle Import Duty, etc.

  4. Types of Taxes – PRC • Turnover Tax (流轉税) • Value Added Tax (增值税) • Business Tax (營業稅) • Consumption Tax (消費稅) • Income Tax (所得税) • Enterprise Income Tax (企業所得税) • Enterprise Income Tax on Foreign Investment Enterprises and Foreign Enterprises (外資企業所得税) • Individual Income Tax (個人所得税)

  5. Types of Taxes – PRC • Property Tax (財產稅) • Urban Real Estate Tax (城市房產稅) • Real Estate Tax (房地產稅) • Activity Tax • Resource Tax (資源税) • City Maintenance and Construction Tax (城市維護建設稅) • Real Property Gain Tax (土地增值稅) • Stamp Duty, etc.

  6. Hong Kong Territorial Concept PRC Residence Concept Resident: Worldwide Tax Non-resident: Only tax on China-sourced income Scope of Charge

  7. Hong Kong April 1 to March 31 Each company can have its own fiscal year end Provisional Tax year PRC January 1 to December 31 All enterprises basically have the same fiscal year, i.e. the calendar year No provisional tax payment system Tax Year

  8. Hong Kong Corporate: Different deadline follow enterprises’ fiscal year end Individual: One month after issuance of return PRC Corporate: Within 4 months after the end of fiscal year Individual: Monthly before the 7th of each following month VAT: 1 day, 3 day, 5 day, 10 day, but usually monthly within the 10th of each following month BT: monthly before the 10th of each following month Others Filing Deadline

  9. Hong Kong Basically, self-reporting system PRC Self-registration and self-reporting system Withholding system Tax Filing System

  10. Hong Kong Corporate: Fixed 17.5% Individual: Progressive or fixed 16% PRC Local: Fixed 33% but lower rate for lower profit enterprises FIE: Fixed 33% or 15% but different rates due to local or statutory preferential treatment Individual: Progressive rate on salary income from 5% to 45%, fixed rate of 20% for other income VAT: 0%, 4%, 6%, 13% & 17% BT: 3% to 20% Tax Rates

  11. Hong Kong Scope Source rule Threshold 60 days PRC Scope Residence rule Source rule Threshold 90 days or 183 days for treaty country Salaries Tax / Individual Income Tax

  12. PRC – Residence vs Source Rule * Tax on a day in day out basis, but different formula

  13. Hong Kong Deductions Personal Allowance Dependent Allowance Mortgage Allowance Education Allowance Rate (2004/05) 2% to 20%; or 16% fixed PRC Deductions Local: RMB800 (per month) Expatriate: RMB4,000 (per month) Rate 5% to 45% Salaries Tax / Individual Income Tax

  14. Individual Income Tax

  15. Who is a Taxpayer? • Individuals who are domiciled in the PRC i.e. those who have permanent registered address, family or economic interests, habitually resides in the PRC • Individuals who have resided in the PRC for a certain length of time. • Note: • “One year” means 365 days in a Tax Year (1 January to 31 December). • This does not exclude “temporary trips out of the PRC” (absence not more than 30 days during a single trip, or not more than a cumulative total of 90 days over a number of trips, within the same Tax Year)

  16. Taxable Income • Wages and salaries (工資、薪金所得) • Operating income of privately owned businesses (個體工商户的生產、經營所得) • Income from contracted management or leasehold management for enterprises or institutions (對企業事業單位的承包經營、承租經營所得) • Remuneration for labor services (勞務報酬所得) • Income from author’s remuneration (稿酬所得) • Income from franchise royalties (特許權使用費所得)

  17. Taxable Income (cont’d) • Interest, dividends, and bonuses (利息、股息、紅利所得) • Income from the lease of property (財產租務所得) • Income from the assignment of property (財產轉讓所得) • Accidental income (偶然所得) • Any other income deemed taxable by the Finance Department of the State Council (經國務院財政部門確定徵稅的其他所得)

  18. Individual Tax Rates • Wages and salaries (工資、薪金所得): • Monthly Taxable Income (RMB) Tax Rate (%) • 0 - 500 5 • 501 - 2,000 10 • 2,001 - 5,000 15 • 5,001 - 20,000 20 • 20,001 - 40,000 25 • 40,001 - 60,000 30 • 60,001 - 80,000 35 • 80,001 - 100,000 40 • 100,001 and above 45

  19. Individual Tax Rates • Operating income of privately owned businesses (個體工商户的生產、經營所得): • Annual Taxable Income (RMB) Tax Rate (%) • 0 - 5,000 5 • 5,001 - 10,000 10 • 10,001 - 30,000 20 • 30,001 - 50,000 30 • 50,001 and above 35

  20. Individual Tax Rates (Cont’d) • Non-Employment Income: • Other investment income include income from royalties, interest, dividend, leasing properties, assignment of properties etc • IIT levied on gross amount at 20%

  21. Expatriate Employees • The extent to which an expatriate employees is subject to PRC individual income tax generally depends on: • The individual’s length of time in the PRC; and • The source of income. • “Source of income” = wages and salaries earned by individuals during the actual course of their work within the PRC, regardless of whether they are paid by enterprise employers or individual employers within or outside the PRC.

  22. Expatriate Employees (cont’d) • “PRC-sourced income” include “income from personal serviced provided inside the PRC because of the tenure of office, employment, the performance of a contract, etc”. • “Non- PRC-sourced income” refers to wages and salaries earned “during the actual course of work outside PRC”.

  23. Expatriate Employees (cont’d) • Items “temporarily exempted from individual income tax”: • Reasonable allowances for housing, meals and laundry received in a non-cash form or on a reimbursement basis in either HK or PRC; • Reasonable one-off relocation costs on a reimbursement basis; • Reasonable allowance for business trips both inside and outside the PRC; • Allowances for home leave to visit family members, language training, and children’s education, provided the costs are approved as reasonable by the PRC authorities. • Mandatory offshore insurance premium

  24. Length of Residence • General Rules • Less than 183 days: • Income tax only applies to PRC-sourced income; and • Paid inside PRC or borne by the PRC FIEs. • Between 183 days and 1 “full” year: • Income tax only applies to PRC-sourced income; and • Paid inside PRC, borne by the PRC FIEs, or paid overseas.

  25. Length of Residence (cont’d) • General Rules (cont’d) • Between 1 “full” year but less than 5 consecutive “full” years: • Considered residents in PRC for tax purposes. • Subject to tax on all their salaries and wages (PRC-sourced and non-PRC-sourced) paid inside PRC or borne by the PRC FIEs. • Exemption only available for non-PRC-sourced salaries and wages paid overseas by foreign employer.

  26. Length of Residence (cont’d): • General Rules (cont’d) • 1 “full” year and 5 consecutive “full” years or more previously without an intervening “breaking” year: • Income tax on world-wide income. • No exemption available for non-PRC-sourced income paid overseas. “Break” year = a year in which an individual spends less than 183 days in PRC. For non-treaty countries, 90 days is used instead of 183 days.

  27. Length of Residence (cont’d): • General Rules (cont’d) • 5 consecutive “full” years in PRC: • If there is a “break” year subsequent to the five or more consecutive “full” years, the five or more consecutive “full” years will no longer be counted, so that the counting of the “full” year begins again from the year immediately after the “break” year.

  28. Length of Residence (cont’d): • General Rules (cont’d) • In connection with PRC-sourced income, the practice of PRC authorities is to allocate salary based on the time the individual spends inside and outside PRC in a given month (i.e. a “days-in/days-out” basis). • e.g. If an individual spends 20 days out of 30 days in a given month inside PRC, then two thirds of his total wages and salaries will be treated as PRC- sourced and one third will be considered non-PRC-sourced.

  29. Counting of days • For Purposes of the 183-day calculation • Only the days on which a non-resident is actually present in China is counted • The day on which a non-resident leaves, enters, or makes one or more entries counted as a whole day • For purposes of apportioning PRC-sourced and non-PRC-sourced income • The day on which a non-resident leaves, enters, or makes one or more entries counted as half a day.

  30. Non-Senior Management Expatriates Working in FIEs Length of Residency PRC-Sourced Income = Days In Non-PRC-Sourced Income = Days Out income paid by PRC employer or borne by establishment in China of overseas employer income paid directly by overseas employer & not borne by an establishment in China income paid by PRC employer or borne by establishment in China of overseas employer income paid directly by overseas employer & not borne by an establishment in China £ taxable non-taxable non-taxable non-taxable 183* days taxable taxable non-taxable non-taxable > £ 183* days 1 yr taxable taxable taxable non-taxable < 1 “full” yr. 5 consecutive “full” yrs previously taxable taxable taxable taxable > 1 “full” yr, 5 consecutive “full” years previously without a subsequent “break” year * 90 days for individuals from a non-treaty jurisdiction.

  31. Senior Management Expatriates Working in FIEs Length of Residency PRC-Sourced Income = Days In Non-PRC-Sourced Income = Days Out income paid by PRC employer or borne by establishment in China of overseas employer income paid directly by overseas employer & not borne by an establishment in China income paid by PRC employer or borne by establishment in China of overseas employer income paid directly by overseas employer & not borne by an establishment in China £ taxable non-taxable taxable non-taxable 183 days taxable taxable taxable non-taxable > £ 183* days 1 yr taxable taxable taxable non-taxable < 1 “full” yr. 5 consecutive “full” yrs previously taxable taxable taxable taxable > 1 “full” yr, 5 consecutive “full” years previously without a subsequent “break” year *If the expatriate is only a senior manager, not a director; and the provision regarding director’s fees in the doubt tax treaty signed between China and the country of the expatriate’s origin does not explicitly apply to senior management, this table does not apply.

  32. Expatriates Working In Representative Offices Length of Residency PRC-Sourced Income = Days In Non-PRC-Sourced Income = Days Out income paid by PRC employer or borne by establishment in China of overseas employer income paid directly by overseas employer & not borne by an establishment in China income paid by PRC employer or borne by establishment in China of overseas employer income paid directly by overseas employer & not borne by an establishment in China £ taxable taxable 1 non-taxable non-taxable 183* days taxable taxable non-taxable non-taxable > £ 183* days 1 yr taxable taxable taxable taxable 1 < 1 “full” yr. 5 consecutive “full” yrs previously taxable taxable taxable taxable > 1 “full” yr, 5 consecutive “full” years previously without a subsequent “break” year * 90 days for individuals from a non-treaty jurisdiction. 1Taxable if representative offices uses deemed profit method for calculating enterprise income tax, or pays no enterprise income tax due to not generating income.

  33. Time Limits for Returns and Tax Payments • IIT calculated and levied on monthly basis (withholding agent or self-declared payer) • Submit tax returns within 7 days after end of month in question • May calculate IIT on an annual basis and make monthly provisional installment in advance if in “special industries” or “specific trades”  final settlement made within 30 days after end of tax year

  34. Time Limits for Returns and Tax Payments (cont’d) • File and pay tax at place where income is derived • Two or more income sources inside PRC, or source outside PRC  may select place to file and pay tax • Income derived under two or more “categories”  generally, compute and pay each “category” separately

  35. Penalties • Surcharge on overdue tax at 0.05%, calculated daily from date obligation first arose; in addition may face: • RMB2,000 – RMB10,000 for failure to make timely tax declaration/payment • Fine of 50% – 500% of unpaid tax/under-payment if deemed to be evading tax • Fine up to RMB50,000 for fake tax calculating evidence

  36. Expatriates working in the PRC

  37. Dual Contract Arrangement • What is a Dual Contract Arrangement? • Two employment contracts – PRC Contract and Overseas Contract • Requirement: separate and distinct job descriptions under the two contracts • Benefit: Expatriates may continue to enjoy benefits offered by Overseas Co, i.e. provident funds, medical insurance, employee stock option schemes, and IIT benefit in certain cases, etc.

  38. Dual Contract Arrangement (cont’d) • Employment Implications • No problem for the Expatriates to obtain the Employment Residence Permits • Employment relationships with the FIE are governed by PRC Labor Law • Foreign Exchange Implications • None, if there is no money remittance between the FIE and the Overseas Co in relation to the employment of the Expatriates, i.e. Overseas Co not receiving any reimbursement for salary paid under the Overseas Contract • Problematic if remittance required

  39. Dual Contract Arrangement (cont’d) • Applicable PRC Tax Legislation and Implications • The Expatriates’ IIT • Depends on his / her length of stay in China and the source of income. • Major tax advantage – if income paid by Overseas Co and not borne by FIE, the Expatriates can benefit from the Days in / Days out Rule • Less useful if an Expatriate spends most of his / her time in the PRC

  40. Dual Contract Arrangement (cont’d) • Applicable PRC Tax Legislation and Implications (cont’d) • The PRC FIE • Income Tax Withholding and Reporting Obligations for salary paid For salary paid under Overseas Contract, same withholding and reporting obligations if the Expatriate is subject to PRC IIT

  41. Dual Contract Arrangement (cont’d) • Applicable PRC Tax Legislation and Implications (cont’d) • Overseas Co • No PRC issue for salary paid by Overseas Co to the Expatriates. • If there is reimbursement by the PRC FIE to the Overseas Co, may have PRC Enterprise Income Tax and Business Tax consequences and foreign exchange consequences.

  42. Secondment Arrangement • What is a Secondment Arrangement? • Overseas Co will second its employees to an FIE and then charge the FIE for the secondment service provided • Expatriates may or may not have direct employment relationships with the FIE • Expatriates may receive salaries in foreign exchange (paid by overseas employer) and/or Renminbi (paid by FIE) • Benefit: Expatriates may continue to benefit from employment with Overseas Co, i.e. provident funds, medical insurance, employee stock option schemes, and IIT benefit in certain cases.

  43. Secondment Arrangement (cont’d) • Immigration and Labor Issues • Whether a local employment contract is necessary for the purpose of getting Employment Certificate and Residence Permit depends on local practice. • Shanghai and Suzhou: a secondment contract is sufficient for this purpose. • Shenzhen: must have a local employment contract

  44. Secondment Arrangement (cont’d) • PRC Tax Implications • The Expatriates’ IIT Obligations • Expatriates’ IIT obligations are the same no matter whether they are directly paid by the FIE or by the Overseas Co: if income is borne by the FIE • The FIE • Withholding and reporting obligations • Overseas Co • payment by the FIE to the Overseas Co will likely be subject to withholding tax on EIT and business tax

  45. Director’s Fee • If the directors’ fees are received from a company resident in HK, they are wholly taxable in HK • Likewise, directors’ fees received from a company resident in the PRC are wholly taxable in the PRC

  46. Different scenarios under which individuals perform cross-border services

  47. Examples 1 • Facts: • HK resident • HK employment • Provide service in both HK and PRC • Compensation fully borne by HK entity • Stay in the PRC for no more than 183 days • HK tax implications • Fully taxable • PRC tax implications • exempt

  48. Examples 2 • Facts: • HK resident • HK employment and seconded to work in PRC • Provide service in both HK and PRC • Compensation borne by both HK and PRC entities • Stay in the PRC for no more than 183 days • HK tax implications • Fully taxable, but can apply for exemption on the part of income being taxed in the PRC • PRC tax implications • only the part of income paid by PRC entity and related to services rendered in the PRC taxable

  49. Examples 3 • Facts: • HK resident • HK employment and seconded to work in PRC • Provide service in both HK and PRC • Compensation borne by both HK and PRC entities • Stay in the PRC for more than 183 days but less than 1 full year • HK tax implications • If visit HK for no more than 60 days, fully exempt; if more than 60 days, need to report the entire income, but effectively, only the part related to HK services will be taxed in HK. • PRC tax implications • The part of income (both paid onshore and offshore) related to PRC service taxable (days-in-days-out)

  50. Examples 4 • Facts: • HK resident • HK employment and seconded to work in PRC • Provide service only in PRC, come back to HK only for weekends and holidays, or daily commute but only work in PRC • HK tax implications • Fully exempt • PRC tax implications • Fully taxable