Using Gabi Rules to Determine the Status of Individual Tax Residents in China
Interpretation of Relevant Policies
“The Interpretation to the ArrangementⅡ?by the State Taxation Administration
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The term of “resident?in the Arrangement is a very important concept. Whether an individual taxpayer has the tax resident status is a prerequisite that must be clarified in order to determine which Side shall a person entitled to individual income tax and the tax treatment.
Due to the difference among tax systems in different countries, there are cases when a person is liable to individual income tax to both Sides. The Protocol to the Arrangement is therefore emerged to avoid double taxation and to prevent fiscal evasion with respect to taxes on income. It applies a “Gabi Rule?to determine which Side that an individual is subject to income tax and its relief or exemption. A noticeable point here is that, this set of rules takes a descending order which means the latter rule can only be applied if the previous one fails to remedy the circumstance. The following parts are the interpretations:
- Permanent Place of Abode
This refers to any kinds of home for staying. For example, rented flat, apartment or rooms. Such place must be permanent, and the individual plans to occupy on permanent basis, rather than short-term stay (like holidays or business trips).
- Centre of Vital Interest
This is determined on an integrated consideration including but not limited to the individual, his\her family, social relations, profession, political, cultural and other activities, operating location, asset management location. In which, the most important is the behaviour of the individual. The determined centre of vital interest should be where the individual most likely to live in, work at, having family and assets.
- Habitual Abode
The standard of “Habitual abode?should be used to determine the resident status of an individual when one of the following two circumstances appears. The first is, the individual has permanent home in both Sides, meantime, unable to determine a centre of vital interest. The second is, the individual has no permanent home available in either Sides, for instance, the individual constantly staying at various hotels on both Sides.
Under the first circumstance, the “habitual abode?compares not only the staying duration at the domiciles (one on each Side), but also the staying duration at different locations within one Side. Whereas under the second circumstance, the “habitual abode?refers to the total staying time the individual committed on one Side, regardless the purpose of staying.
- Nationality
If the individual has no habitual abode on either Side, the resident status should be determined by his\her nationality.
However, if the above rules all fail to apply, the individual shall apply a mutual agreement between competent authorities from both Sides according to the Arrangement.
Case Study
Quote from “The Protocol to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region?practical cases
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- Background
Mr. S is a Hong Kong tax resident and he can enjoy the tax treatment according to the Arrangement. He wishes to get a refund of IIT paid to the Mainland of China during the past years. However, considered that Mr. S qualifies the definition of tax resident of both Sides, the tax authority applied “Gabi Rules?and concluded that Mr. S is a tax resident prior to the Mainland of China. Thus, rejected the refund request.
- Replenish Background
In 2013, Mr. S signed an indefinite employment contract with a mainland company C for the role of COO. The contract specifies a working location in a mainland city. Since 2014, Mr. S jointly works as an executive manager at company D, a Hong Kong based subsidiary controlled by company C.
Mr. S believes that his employment status is applicable to the IIT computation of residents of Hong Kong, according to the Arrangements. Thus, requested a refund of approximately CNY400,000 IIT paid during 2014 and 2015 for the following reasons:
(1) Mr. S holds a valid Hong Kong Identity Card (as non-permanent resident);
(2) Competent tax authorities of Hong Kong provided Mr. S with his taxpayer identity proof for the year of 2014 and 2015.
- Process and Result
The competent authority of the Mainland of China fully examined the document provided by Mr. S, the following explanation and result were given after thorough investigation:
(1)
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According to mainland legislations, Mr. S is a tax resident of the Mainland of China
According to the IIT law and its practical rules, there are two standards to determine “permanent home available?and “time of duration?of an individual. An accomplishment of either one will qualify the individual to be a taxpayer of the Mainland of China. In which, “permanent home available?refers to habitual living in the Mainland of China due to his or her domicile, residency, place of effective management or any other criterion of a similar nature. Habitual living here is a legal sense rather than a factual or short-term residence status. For example, temporary staying abroad for studying, working, visiting or holidays do not change the legal sense that a person is a tax resident of the Mainland of China.
In practice, resident permanent residence is the critical determine factor in considering whether an individual holds a domicile. In the case of Mr. S, his supplement document, the copy of his ID card, suggests his residency is in the Mainland of China. At the same time, Mr. S only resides in Hong Kong during the employment term at company C (‘s holding subsidiary company D). Once this employment status ends, Mr. S will return to the Mainland of China. In summary of above facts, Mr. S should be treated as a taxpayer of the Mainland of China.
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(2)
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Apply Gabi Rules, Mr. S is a tax resident of the Mainland of China
Under the case when Mr. S validates the concept of taxpayer in both the Mainland of China and Hong Kong Special Administrative Region, the competent authorities applied Gabi Rules for reassurance.
- Permanent Place of Abode
According to the Arrangement (between the Mainland of China and Hong Kong Special Administrative Region) Article 4 Paragraph 2.1, when an individual is resident to both Sides, the individual should decide one of them for domicile. If the individual has permanent home available on both Sides, then the individual shall be deemed to be a resident only of the Side with which his\her personal and economic relations are closer (“centre of vital interests?.
Mr. S holds 3 self-use residential properties in the Mainland of China. Mr. S stayed in one of them during and before the employment in Hong Kong. Therefore, the Mainland of China is reasonably considered to be his domicile. However, at the same time, Mr. S rents a property in Hong Kong for his convenience during the working period. It satisfies the concept of domicile as well. Thus, the first Gabi rule, Permanent Place of Abode, cannot provide a clear conclusion.
- Centre of Vital Interest
Evidently, Mr. S is employed by a mainland company C, jointly working at C’s Hong Kong subsidiary D, in the job description, a working location of a mainland city is specified. The factual working status in Hong Kong is a consequential fulfilling behaviour of the employment contract between Mr. S and company C. His income comes eventually from company C, which in addition, also pays social insurance and house provident fund for him, while the subsidiary company D does not.
Mr. S mainly works in the Mainland of China. In 2014, Mr. S stayed 220 days in the Mainland of China and 160 days in 2015. As information provided by a 3rd party, most relatives of him are in the Mainland of China. He has stable social connections in the Mainland of China, as well as most of his family and assets. Although his wife and daughter obtained valid Hong Kong Identity Cards (as non-permanent resident), they have no social connections. As his wife does not have a job, his daughter is a high school student.
With above consideration, the competent authorities conclude that his centre of vital interest is the Mainland of China instead of Hong Kong Special Administrative Region. Thus, Mr. S is a taxpayer to the Mainland of China prior to the other Side.
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(3)
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Follow-up on Mr. S’s case
Since the conclusion that Mr. S is a taxpayer of the Mainland of China, he is not entitled to IIT exemption in the Mainland of China. The refund request is rejected.
The competent authority sent this result back to Mr. S, and notified him the following repeal approach. Which is, according to the Arrangement between the Mainland of China and Hong Kong Special Administrative Region, he shall request a mutual agreement adoption application through the competent authority of Hong Kong Special Administrative Region if he wish to repeal. The competent authorities from both Sides shall then reach an agreement accordingly.
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For the full text of the latest revised clauses of the "Arrangements", please refer to: Arrangement between the Mainland of China and Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
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