Loopholes in Chineese Taxation and Freelance Projects?
There are several factors that influence the taxes paid by foreign freelancers
The first step in a freelance project for a foreigner in China is to have a contract with the customer, a Chinese company or foreign invested company, etc. Based on that contract and an invitation from the customer, the freelancer should apply for a business visa while still abroad. Please note that the tax authorities are only interested in taxation and not in the way a foreigner resides (legally) in China. If the freelancer works on several projects in China, residing legally in China may be a problem.
In general the income of a freelancer is subject to individual income tax. The income should be classified as individual service income; it is taxed at the proportionalrate of 20% and on a per receipt basis. In case the freelance project exceeds the total of RMB 20,000 (approx. EUR 2,400), the tax rate is increased to 30%. A deduction of 20% of the receipt amount (project amount) for amounts of RMB 4,000 and more or RMB 800 for amounts less than RMB 4,000 is allowed.
Chinese tax law clarifies the difference between employment income, e.g. wages and salaries, and income for individual services. Employment income is the remuneration received by individuals for performing non-independent individual labor activities, e.g. while holding a position or being employed by enterprises or other organizations. Individual service income is derived by individuals for providing various skills or labor services without the existence of an employment relationship. In practice the tax authorities may look at the manner in which the taxpayer performs the work. Freelancers use their own tools and equipment, are not required to be present at a place of work during regular hours, are not covered by workers compensation insurance and do not enjoy staff medical or other fringe benefits provided by the enterprise or organization for which the work is performed.
Since the freelancer is a foreigner and because China has signed bilateral tax treaties with numerous countries, the situation of a foreign freelancer in China is typically subject to such a treaty. In most cases the tax treaties state that the foreign freelancer should be taxed in the other country (China) if he/she has a fixed base, e.g. an office, warehouse or other facilities. If the foreign freelancer stays in China for less than 183 days he/she is not subject to individual income tax. The freelance income is then subject to taxation in the home country.
To sum up, a foreign freelancer can perform services in China, and the laws and regulations are pretty clear as to how and when taxes should be paid. However it is advisable to organize business activities in China carefully. For longer assignments and projects it may be beneficial to have an employment contract in order to enjoy tax benefits such as allowances for housing and moving costs for foreign expatriates in China. As a freelancer it is not possible to get these benefits. In addition, with an employment contract it is also possible to obtain work and residence permits.
Robert Lipsky, ECOVIS Shanghai Ruide Certified Public Accountants Co., Ltd., Shanghai, China, email@example.com
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