Taxes for Expats – The US – China Tax Treaty
The US-China tax treaty was signed in 1984 and came into effect in 1987. Unlike many other US tax treaties, it hasn’t been updated since or added to since.
The purpose of the treaty is to prevent double taxation for Americans living in China and Chinese citizens living in the US. The principle way it achieves this is by allowing expats to claim Chinese tax credits against US taxes paid on US sourced income, and US tax credits against Chinese source income. So US expats living in China must file both Chinese and US taxes.
US taxes for expats in China
The US taxes based on Citizenship, meaning that all US citizens and green card holders, including US expats living in China, with worldwide income of over $12,000 a year, or just $400 of self-employment income, are required to file a US tax return each year.
China on the other hand only requires Chinese residents to file Chinese taxes. An American typically qualifies as a Chinese tax resident if they have a residence in China, or if they’ve maintained a temporary residence in China for a year, or if they’ve been in China for 60 months in the last 120 months.
This leaves many US expats living in China having to file two tax returns, and also puts them at risk of double taxation.
Expats receive an automatic filing extension for their US taxes until June 15th, and they can request a further extension until October 15th if they need to, giving them plenty of time to file their Chinese taxes first (due by March 31st) .
US expats in China may also have to file a Foreign Bank Account Report (FBAR), if they have over $10,000 in total in non-US based bank and investment accounts at any time during the year (including any that they have signatory authority or control over, even if not in their name).
The United States – China Tax Treaty
“There are 40 cities in China with a population of more than 2 million people. In the United States, there are four. Imagine having seven New Yorks. Then, triple one of those New Yorks in order to contemplate life in Shanghai.” – Matador Network
The United States – China Tax Treaty covers double taxation with regards to income tax and capital gains tax, however, as already mentioned, due to a Savings Clause, the benefits are limited for Americans expats living in China. The treaty does ensure though that no one will pay more tax than the higher of the two countries’ tax rates, and it also defines where taxes should be paid , which normally depends on where the income arises.
The only exceptions to the Savings Clause in the US-China Tax Treaty are for American researchers, teachers, students, diplomats, professional athletes competing, and for pension income.
The way for US expats to avoid double taxation on their income arising in China is to claim US tax credits to the same value as Chinese income taxes that they’ve already paid.
For income arising in the US, Americans in China can claim Chinese tax credits against income US taxes paid to the IRS.
To claim US tax credits against Chinese taxes paid, expats must file form 1116 when they file their federal tax return. By doing this, the vast majority of US expats in China won’t end up owing any US income tax.
Alternatively, expats can claim another exemption called the Foreign Earned Income Exclusion by filing form 2555, which simply allows them to exclude the first around $100,000 of their earned income from US taxation. Which exemption is most beneficial depends on each expat’s circumstances (e.g. their types of income, residency status, income levels, where their income originates, etc).
It is possible in some circumstances to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit, although they can’t both be applied to the same income.
Article 25 of the US-China Tax Treaty also contains a clause that allows the Chinese government to send US expats’ Chinese tax information directly to the IRS, as well as their Chinese bank and investment account balances.
To claim a provision in the United States – China Tax Treaty (besides claiming US tax credits), expats should use IRS form 8833. For example, article 20 of the treaty exempts American students in China from paying Chinese taxes on their student income.
Expats in China who are behind with their US tax filing because they were unaware of the requirement to file from abroad can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.