Will an expatriate’s China tax position change due to COVID-19?

One question may arise due to COVID-19: will an expatriate change his/her tax position if he/she is stranded overseas for a long period of time due to COVID-19? Unfortunately, there is no definite answer, given that the situation still needs to be assessed on a case-by-case basis. Having said that, the China State Administration of Taxation (SAT) has recently responded to certain hot questions in interpreting the COVID-19-affected tax treaty clauses and has taken a concession view.

In the SAT’s response, it explains that, if an individual has to live elsewhere due to COVID-19 control measures and has become a resident in both places, said temporary stay usually should not cause a person to relocate his or her permanent home or centre of vital interests. Thus, it should not affect the residency under a tax treaty.

For example, an expatriate assuming only one position in China cannot return to China due to a travel ban or quarantine requirements. He/she is asked to continue his/her work from his/her German home for as long as the COVID-19 outbreak continues and still receives a salary from the Chinese company. Will his/her taxation change from China IIT perspective?

Situation 1: This expatriate stays in China for more than 183 days in 2020

As per China IIT law, the expatriate will be a Chinese tax resident for the calendar year concerned. But he/she may also become a resident in Germany due to the travel restrictions and quarantine measures. The challenge here is to determine the final place of residence of the individual.

According to the tax treaty clauses, the tax residency should be assessed on four factors in sequence if two or more countries consider an individual a tax resident: a. permanent home; b. centre of vital interests; c. habitual abode; d. nationality.

The “permanent home” should be “permanent”, rather than a temporary stay. Special attention shall be paid to acts of the individual for being the centre of vital interests, i.e. the country in which an individual always lives, works and has his/her family and property.

In the recent interpretation by SAT on the tax treaty, the COVID-19 situation will not affect the treaty residence position, given that said temporary dislocation will not change an individual’s permanent home or centre of vital interest. Therefore, the expatriate is still considered to have his permanent home in China and thus treated as a Chinese tax resident. As a result, the income received from the Chinese employer during his/her prolonged stay in Germany is still treated as China-sourced income and should be fully subject to Chinese tax. His/her taxation scope remains unchanged in China.

Situation 2: This expatriate resides in China for less than 183 days

Under this situation, the expatriate is a non-tax resident in China. However, given that he/ she assumes only one position in China and receives all of his/her remuneration from the Chinese company, he/she is still taxed on his/her full employment income as a China sourced income, regardless of where he/she is working.

Conflicts may occur once the expatriate is also taxed as a tax resident in Germany. OECD has issued recommendations on the implications of COVID-19. It urges that the residence country should avoid double taxation, either by exempting the income or by taxing it and giving a credit for the source country tax. Given the new interpretation by SAT, it is suggested to seek the possibility for the home country to exempt the income that has been taxed in China.

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