This article explores the 6-Year Rule, its implications for tax residency in China, and strategies for expatriates to optimize their tax liabilities through careful planning.
Background
China’s 6-Year Rule is a pivotal component of the Individual Income Tax Law (IIT Law), which defines the tax residency and obligations of expats and foreign nationals. This rule emerged from a series of legislative reforms aimed at modernizing China’s tax system, beginning with the revision of the IIT Law and the subsequent issuance of detailed implementation guidelines.
These guidelines formally established the criteria for tax residency, marking the introduction of the 6-Year Rule, which became effective on January 1, 2019. Therefore, 2024 will be the first year that expats may be subject to taxation on their worldwide income if they meet the residency criteria.
6 Years Rules in China
To become a tax resident under the 6-Year Rule, an individual must meet the following conditions:
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183-Day Requirement: The individual must be physically present in China for 183 days or more in each of the six consecutive years. Days spent in China are counted based on the individual’s presence for a full 24 hours
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Consecutive Years: The six years must be consecutive. However, if the individual leaves China for a single trip of 30 consecutive days or more during any of the six years, the count resets, and the individual avoids becoming a tax resident.
The 6-Year Rule serves as a crucial determinant for expats regarding their tax obligations in China. Its implications extend beyond China-sourced income to include worldwide income once the threshold is met.
Strategic Tax Planning For Expats
6-year Rule Reset Mechanism
The rule offers opportunities to reset the 6-year count, allowing expats to strategically manage their tax residency status. This can be achieved through:
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Staying in China for fewer than 183 days in any given calendar year; or
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Leaving China on a single trip for more than 30 consecutive days within a calendar year.
By leveraging these reset mechanisms, expats can better control their tax residency status and potentially reduce their exposure to global income taxation in China.
Recommendations for Optimizing Tax Liabilities
1. Strategically Plan Extended Absences
Strategic scheduling of vacations or work assignments outside of China—either staying less than 183 days in a given year or leaving the country for more than 30 consecutive days—can effectively reset the six-year period, offering flexibility in your tax obligations.
2. Take Advantage of Tax Exemptions
Foreign nationals meeting China’s tax residency criteria have two valuable options. With the updated China IIT guidelines in 2023, expats can either opt for a special additional deduction on personal income tax or continue benefiting from traditional tax-free perks, such as housing allowances, language course fees, and children’s education expenses. These exemptions, originally set to end in 2023, have been extended until the end of 2027, providing ongoing relief for expatriates looking to minimise their tax burden.
3. Consult a Professional Tax Advisor
China’s tax landscape, especially with the intricacies of the 6-Year Rule, can be challenging to navigate. A professional can guide you through the complexities, helping you leverage exemptions and other available benefits to reduce your overall tax liabilities.
Integra Group is a fully licensed asia-focused accounting, taxation, and business advisory firm – with dedicated offices in Shanghai, Beijing, Singapore and Taipei. We’ve helped companies ranging from Fortune 500 companies to small to medium sized businesses establish and grow their presence in Asia.
