A Japanese personnel, sent by his Japanese company, came to Shanghai to handle the issues of setting up a foreign invested logistics company. His main task was to investigate each economic zones, including gathering tax policies and commercial information of bonded zones, science gardens, industrial gardens and report them to the headquarter in Japan, so that decisions can be made upon them. From April to the end of 2003, he was residing in China except two short reporting back to Japan. He was paid $3000 per month for his work by his Japanese employer. Later on, the Chinese tax administration wanted individual income tax from him for his salary with the actual resident period in China in 2003.

According to notice No.Guo Shui Fa 148 [1994] and other relative regulations, for citizens from nations with which China has concluded bilateral tax agreements, who has resided in China over 183 days, all of their income during the stay in China shall be levied with individual income tax. According to these regulations, for people who employed by foreign companies and worked in their offices or subsidiaries in China and paid oversea, their tax obligation is clearly stipulated.

However, in this case, this Japanese employee was just collecting information in China. He didn’t perform any task for any entity located in China. Should he pay income tax for his salary if he stayed in China more than 183 days?

There is currently a trend within tax administrations: if a foreigner has resided in China over 183 days, no matter whether he belongs to any entity in China or not, individual income tax shall be levied for his salary income.

We believe, this kind of policy complies with neither tax principle nor current legislations.

According to the provision in bilateral tax treaty between China and Japan, the prediction for a contracting party to levy tax from citizen of another contracting party is the employment of this citizen in the first contracting party. Without employment, even the salary is obtained in the first contracting party, it isn’t entitled to levy tax from this income.

From this provision it is reasonable for us to believe: citizens may be employed in any side between China and Japan. The employment in one country doesn’t necessary leads to employment in another country. The employment in one country can neither be deemed as ‘employment’ in another country. Therefore, ‘employment in another contract party’ only means worked for certain entity in another country by performing tasks.

As for the Japanese employee in this case, he was performing tasks assigned by his company, and wasn’t employed in China. Therefore, it doesn’t comply with any legislation to claim tax from this foreigner who are not employed in China.

Furthermore, article 91 of Rule of PRC to Administer Tax Levying and Collection provides, if there is any international treaties or agreements that includes different provision with this law, the international treaty or agreement shall prevail. Given this provision, even there is stipulation in our legislation to give administration rights to levy tax from foreigners not employed in China, they may not be applied because of the Sino-Japan tax treaty.