Thursday, August 16, 2012

Which Visa Must Your Employees Have?

China has passed a new law to take effect July 1, 2013. According to government officials, these rules are not new but simply codify current law enforcement practices. In summary, non-Chinese citizens who are found to be working in China without a work visa or residence permit will be fined and possibly deported. The employer will also face fines for having a foreigner working for them.

One large change is that the requirement for remuneration has been removed from the law, now focusing on whether the foreigner is “working.” The new law does not repeal theForeigners in China Provisions, which does retain the definition that working is social work for the benefit of labor remuneration. Calls to law enforcement and immigration ministries have provided no detail on what is considered “social work.” All departments have replied that they will determine each case on an individual basis. From our experience, working has meant receiving payment for goods or services from a Chinese company or individual. The new wording implies that simply being seen in an office on a computer will be enough for the police to question you although we won’t know until next year. 
Worse, the new law now expressly authorizes deportation for foreigners for illegal work. In comparison, those who simply stay in China longer than their visa allows will be given a warning and on subsequent violations a fine of up to 10,000RMB. Severe cases, which are at the government official’s discretion to determine, can incur a 100,000RMB fine and detention for 15 days. Those who are “unsuitable” to remain will be given a deadline to leave, and will not be allowed to return for 1-5 years. In severe situations (again, at the discretion of the government office), the foreigner will be deported. After deportation, the foreigner will not be allowed to enter China again for 10 years. This is in addition to a fine on any company the foreigner worked with of 10,000RMB plus the confiscation of any income earned by the company from such work.

This new law will also likely make receiving a visa more difficult as well. The regulation states that a visa should not be issued to a person who is likely to engage in activities prohibited by their visa (link in Chinese). Thus, anyone entering China on an L visa (also known as a tourist visa) that has been renewed several times without leaving China for a significant amount of time will be suspect. The new law also forbids officials from stating the reason for denying a visa, leaving foreigners with little ability to appeal denials.

So what can a foreigner do to avoid the penalties and possible deportation? The best thing a foreigner can do is get an employment visa instead of the common tourist or business visa, especially if they are planning on staying long term in China. For those people who stay in China for business reasons, the best option is often to set up a company in China and work as the manager. While the initial investment to set up a company will vary depending on the industry, people who plan on staying in China for more than a year find the investment will pay for itself in peace of mind. This strategy has the added bonus of making sure Chinese partners can’t report you as working illegally in order to take over your business.

With experienced legal counsel, a foreigner can live and work in China without fear for many years.

Posted by Frank Caruso at IPG.

Tuesday, August 14, 2012

Another Reason for Establishing a Company in Hong Kong for Entering the Chinese Market

As those of you who have read my blog over the past 6 or 7 years (I can’t even remember how long I have been writing it) you know that I have always been a big fan of Hong Kong. Ever since 1989 when I sailed into Hong Kong on U.S. Navy ship as a young U.S. Marine Officer I have been enthralled with the city.

While the dramatic beauty of Central and the sky scrapers overlooking Victoria Harbor against a backdrop of lush green mountains, the iconic Star Ferry and other attractions make it my favorite city in the world, it is the business climate and rule of law that make it the best place in the world to do business.

I have written about this in Hong Kong and the Rule of Law and Hong Kong Phooey and numerous other articles on the topic. I also advise my clients from all over the world on using Hong Kong as the only legal corporate structural platform for their entry into China and South East Asia. Well, we now have another reason to support Hong Kong as a market entry, financial and administrative center for China operations – regardless of the scope of business.

China’s State Administration of Taxation just announced a change in the rules governing the withholding tax that foreign investors pay on dividends repatriated from their share of investments in Chinese companies. Companies and shareholders based in countries outside Mainland China (such as the United Kingdom, Hong Kong and Singapore) that have double taxation agreements (DTAs) with China will only have to pay 5% in withholding tax on the dividends they receive from Chinese companies, instead of the usual 10% payable by companies and shareholders resident in countries without DTAs (U.S. and many EU companies).

Although the reduced rate has been available for several years Hong Kong holding companies did not meet the ‘substantial business activity’ requirement which has in effect been removed. So, now there is even more reason to use Hong Kong as the structural platform for you operations in China and beyond.

Posted by Frank Caruso, Chair China Practice Team at IPG.

Taxes on U.S. Citizens Residing Abroad

Everyone wants to avoid taxes and only a few people really know how.  This goes double for US citizens who earn income in China.  This is because the US taxes foreign income as well as income earned within the States.  Even worse, the IRS requires any US person with a financial account overseas to register it with the treasury department, as long as such account has held over $10,000USD at some point during the year. This provision was meant to discourage the use of overseas tax shelters, but they equally apply to US people teaching English in China that have managed to save $10,000USD in their Bank of China account. And speaking from personal experience, the process is complicated because it involves both the IRS and the Treasury department.  Luckily, the filing can be done online, even if it is not particularly simple.

For those earning a salary in a foreign country, the most important exclusions to know about are foreign earned income and foreign housing exclusions.  For 2012, the foreign earned income exclusion is up to $95,100 and the foreign housing exclusion/deduction is 30% of the foreign earned income exclusion (but varies by location).  The housing exclusion applies to income received from an employer, and the deduction applies to self-employment income. The details for calculating the foreign housing exclusion/deduction are maddeningly complicated and beyond the scope of this article.  The foreign earned income exclusion is more straightforward as it directly excludes the income from taxes.   Most important to these exclusions is how to qualify for them.

First, you must be a resident alien or citizen of the United States.  Resident aliens are those who have Green Cards or who have been in the United States for a total of 183 days over the past 3 years, only counting 1/3 of days in the 2nd year and 1/6 of the days in the least recent year. (That is the easy math. Imagine what the housing exclusion entails.)

Second, you must have a foreign country as your tax home.  This means you have employment in that country and it is where you permanently or temporarily work.  Business trips don’t count, but moving there to fulfill employment or contract work likely would. As a general rule, if you expect to be working in the country for over a year, it is your tax home.

Third, you must be in a foreign country for a significant time, determined by the bona fide resident test or the physical presence test.  Bona fide residence means you are living in a foreign country as a resident would for a full tax year. Each case is evaluated individually, but those who rent an apartment in a foreign country, live there 7 days a week, and only leave the foreign country for business and vacation with a clear intention to return to the foreign country, are almost certainly residents. The physical presence test is for those who live a long time in a foreign country but not the January-December tax year.  If you spend 330 days in a foreign country over a consecutive 12 month period, you meet the physical presence test.  Unlike the bona fide resident test, you could live out of your suitcase, travel through Europe to multiple countries for any reason, and as long as you spent 330 days outside the US you can meet the test.

Finally, you must have foreign earned income. Usually, foreign earned income is any income earned when you have met the tax home and bona fide residence/physical presence test. Foreign income also includes housing and meals provided by the employer, allowances such as cost of living or education reimbursement, and commissions earned. Money from the US government or a pension does not count as foreign earned income.
If all four factors are met, then you can use the exclusions and can avoid some or all US taxes on your foreign income.  Of course, if you have set up a company in a foreign country, the process is very different. 

Posted by Frank Caruso.  Chair, China Practice Team for IPG. _________