Kristina Koehler-Coluccia, Head of Business Advisory at Woodburn Accountants & Advisors, offers a quick guide on the income tax implications of China’s “six-year rule” for foreigners working in China
In 2019, China introduced a significant change to its individual income tax (IIT) system by implementing the “six-year rule” for foreigners. This rule, which starts applying in 2024, determines how foreign residents are taxed on their overseas income.
What is the six-year rule?
According to the revised IIT system, foreigners who reside in China for 183 days or more each calendar year are considered tax residents. If a foreign individual remains a tax resident for more than six years, they become liable for tax on their global income, including income from foreign sources. This is known as the “six-year rule.”
China’s tax rates are relatively high for high-income earners — 35% for annual taxable income between RMB 660,000 (approximately £70,250) and RMB 960,000 (approximately £102,183), and 45% for income exceeding RMB 960,000. Due to these rates, foreigners often seek to avoid IIT on their overseas income.
The year 2024 is crucial as it is the first time the six-year rule will be enforced. Foreigners should carefully review their tax residency status and consider strategies to reset their six-year period.
How is the six-year rule period counted?
On 16 March 2019, China’s Ministry of Finance (MOF) and State Taxation Administration (STA) issued Announcement [2019] No. 34, which outlines the calculation of tax residency for foreigners.
The key points from the announcement are as follows:
- The six-year period calculation starts from 1 January 2019. Any residency prior to this date does not count.
- A year of residence is defined as staying in China for at least 183 days within a calendar year.
- Days spent in China for less than 24 hours in a single day are not counted.
Example:
Mr Chen, a Hong Kong resident working in Shenzhen, travels to China every Monday morning and returns every Friday evening. His stays are less than 24 hours on Mondays and Fridays, and he spends weekends in Hong Kong. Hence, for tax purposes, Mr Chen is considered to be in China for only three days per week. With 52 weeks in a year, his total stay amounts to 156 days, which is fewer than the 183 days required to be a tax resident. Consequently, Mr. Chen’s overseas income remains tax-exempt in China.
Resetting the six-year rule period
According to the MOF STA Announcement [2019] No. 34, if a foreigner has stayed in China for fewer than 183 days in any year within the previous six years, or if they leave China for more than 30 consecutive days, they can reset the six-year period.
Example:
Ms Patel moved to Shanghai on 1 January 2015 and has been living there since. However, since the counting of years started only from 1 January 2019, Ms Patel is not yet subject to global income tax in China. To avoid worldwide income tax starting in 2025, Ms Patel decided to spend January and February 2024 in Hong Kong. By leaving China for over 30 consecutive days, Ms Patel resets her six-year period.
Tax Implications After Six Years
From 2025 onwards, if a foreign individual has lived in China for 183 days or more in each year over the previous six years and has not left for more than 30 consecutive days in any year, they will be taxed on their global income.
Example:
Mr. Zhang moved to Beijing on 1 January 2019. Except for a two-month absence in 2025, he has lived in China for at least 183 days each year and never left for over 30 days. His tax obligations in China are as follows:
In this example, Mr Zhang’s two-month absence in 2025 triggers the six-year rule, making him liable for global income tax starting in 2025, though his absence allows him to reset his tax obligations in 2026.
The six-year rule affects various types of income, including wages, service remuneration, author’s fees, royalties, business income, interest, dividends, lease income, property transfer income, and contingent income. Foreigners should manage their residence days and departure times carefully to avoid unexpected tax liabilities.