U.S. Income Tax Treaty:
In 1982, the United States and China entered into an income tax treaty in an effort to alleviate certain occurrences of double taxation on income. Specifically, within China, this treaty applies to (1) the individual income tax; (2) the income tax concerning joint ventures with Chinese and foreign investment ; (3) the income tax concerning foreign enterprises; and (4) the local income tax. Within the United States, this treaty applies to the Federal income taxes imposed by the Internal Revenue Code.
Key Income Tax Treaty Features:
Income received by residents of China for personal services provided as independent contractors or self-employed individuals (independent personal services) during the tax year in the United States is exempt from U.S. income tax if the residents (1) are present in the United States for no more than 183 days in the calendar year, and (2) do not have a fixed base regularly available in the United States for performing the services. If a fixed base is available in the United States, they are taxable on the income attributable to the fixed base.
Income received by residents of China for services performed as an employee (dependent personal services) in the United States is exempt from U.S. tax if (1) the residents are present in the United States for no more than 183 days in the calendar year; (2) the pay is paid by or for an employer who is not a U.S. resident, and (3) the pay is not borne by a permanent establishment or fixed base that the employer has in the United States. These exemptions do not apply to directors’ fees for service on the board of directors of a U.S. corporation. These fees are taxable in the United States.
Generally speaking, income of public entertainers is taxable in the country where the income is earned. However, public entertainers, such as athletes, may be exempt from dual taxation if the public entertainers are participating in a cultural exchange program agreed upon by the U.S. and Chinese governments.
Students, Professors, Teachers, and Researchers
An individual who is a resident of China and who is temporarily in the United States as a student, business apprentice, or trainee is exempt from income tax on (1) payments received for purposes of assisting with the student’s education (including living expenses); (2) grants or awards from a government, scientific, educational, or other tax exempt organization; and (3) income from personal services performed that do not exceed $5,000. In order to qualify for this exemption, the student/trainee must have been a resident of China immediately preceding their time in the U.S. An individual is eligible for this exemption for such a period of time as is reasonably necessary to complete their education/training.
An individual who is a resident of China and who is temporarily in the United States primarily to teach, lecture, or conduct research at a university or other accredited educational institution or scientific research institution is exempt for 3 years from U.S. income tax on income derived from those services. However, it should be noted that this exemption does not apply to income from research carried on mainly for private benefit rather than in the public interest.
Gains derived from the alienation of real property situated in the United States may be taxed by the United States.
Gains derived from the alienation of personal property used in conjunction with a business that has a permanent establishment are taxable in the country where that establishment is located.
Generally, gains from the alienation of property are taxable in the country where the property is situated.
Dividends received by a Chinese resident are taxable in China. If these dividends are paid by an American company, the United States can tax these dividends at 10%. However, certain caveats to this rule do exist. If the dividends are effectively connected to work performed at a permanent location in the United States, then any restrictions imposed by this portion of the treaty are not applicable, and the United States can tax the dividends in accordance with their own laws. For a more detailed understanding of rules applicable to the taxation of dividends, see Article 9 of the Income Tax Treaty between China and the United States.
Interest received by a Chinese resident will be taxable in China. The interest received may also be taxed by the U.S. at a rate of 10% if the payable interest arose within the U.S. However, if the interest payment was derived by the government or any financial institution wholly owned by the government, that interest shall be tax exempt from the other government. Other exceptions also exist. For instance, if the interest due is related to personal services provided from a fixed base, then that interest may actually be considered taxable under business profits or independent personal services. In that event, separate provisions apply. For a more detailed understanding of these portions of the treaty as well as other additional interest caveats not discussed here, see Article 10 of the Tax Treaty between China and the United States.
Royalties received by a Chinese resident will be taxable in China. If these royalties are paid by an American company, then the United States will also be allowed to tax this receipt of income. However, the United States may not tax royalties at a rate higher than 10%. Exceptions to this portion of the tax treaty exist and are similar in nature to those listed in the Interest section above. Specifically, this portion of the treaty contains specific caveats for royalties that arise from the government. It also contains other exceptions including one for royalties effectively connected with services provided at a permanent location. For a more detailed understanding of how this treaty deals with royalties, see Article 12 of the Tax Treaty between China and the United States.
Pension and Annuity payments made will be taxable in the country where the recipient resides. As such, a Chinese resident will be taxed in China. Dual taxation on these payments is not allowed under the treaty. As with other portions of the treaty, an exception to this rule exists. Generally, if the payments are received from a government authority or political subdivision, then the paying government is the only government allowed to tax those payments. However, exceptions to this exception do exist. As such, for a more detailed understanding of how this treaty deals with pension and annuity payments, see Articles 17 and 18 of the Tax Treaty between China and the United States.
Social Security payments are taxable by the country who made the payments.
For a general Overview Summary of the Tax Rates for Investment/Other Income, see the following table.
Dividends Paid by US Corporation - General
Dividends Paid by US Corporation - Qualified for Direct Dividend Rate
Interest Paid by US Obligors - General
Inerest Paid on Real Property Mortgages
Interest Paid to Controlling Foreign Corporation
Royalties Paid Industrial Know-How
Royalty Paid Industrial Equipment
Film and TV
Pensions Paid by US Fed Govt
Pensions Paid by Others
Social Security Paid by US Govt
a The exemption or reduction in rate does not apply if the recipient has a permanent establishment in the United States and the property giving rise to the income is effectively connected with this permanent establishment. Further, the exemption or reduction in rate also does not apply if the property producing the income is effectively connected with a fixed base in the United States from which the recipient performs independent personal services.
b Tax imposed on 70% of gross royalties for rentals of industrial, commercial, or scientific equipment.
c Exemption does not apply to U.S. Government (federal, state, or local) pensions and annuities; a 30% rate applies to these pensions and annuities. For this purpose, railroad retirement tier 2, dual, and supplemental benefits are not considered U.S. Government pensions or annuities. U.S. Government pensions paid to an individual who is both a resident and national of China are exempt from U.S. tax.
U.S. Estate and Gift Tax Treaty:
Currently, there is not an estate or gift tax treaty between China and the United States.
The tax treaty between China and the United States does help alleviate certain forms of double taxation. However, as with other tax treaties, this treaty only provides a benefit to the taxpayer who files the appropriate paperwork and utilizes the tax treaty benefits. As such and as with all other tax treaties, it will probably make sense to consult a professional familiar with tax treaties when trying to utilize this treaty.