Private client law in China: overview

A Q&A guide to private client law in China.

The Q&A gives a high level overview of tax; tax residence; inheritance tax; buying property; wills and estate management; succession regimes; intestacy; trusts; charities; co-ownership; familial relationships; minority and capacity, and proposals for reform.

To compare answers across multiple jurisdictions, visit the Private Client Country Q&A tool.

The Q&A is part of the Multi-jurisdictional Guide to Private Client law. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateclient-mjg.

Stephen Nelson and Todd Wang, DLA Piper, Hong Kong
Contents

Tax year and payment dates

1. When does the official tax year start and finish in your jurisdiction and what are the tax payment dates/deadlines?

The tax year in China starts from January 1 and ends on December 31. Individual income tax (IIT) is generally calculated and paid on a monthly basis, except for tax on business income, which is assessed on an annual basis.

With respect to IIT on wages and salaries, individual returns and withholding tax returns must be filed monthly within the first seven days of the following month. In most cases, IIT is paid by way of withholding; however, an individual may be required to file and pay tax personally in certain circumstances including:

  • Where there are multiple sources of income.

  • When income is received from a person other than a withholding agent.

  • When there are single payments for different types of income, such as income from paintings, royalties or the leasing of property.

In the case of business income, an annual return is generally required within three months of the end of the year, but estimated payments are typically made monthly during the year in advance of the final return. Similarly, in the case of lease payments, an annual return is filed after the end of the year, but estimated payments are made within seven days of the end of the month in which any instalment of rental is received. An individual that receives foreign income on which foreign income tax has to be paid must file a personal return 30 days after January 1, if the foreign tax is paid as income is earned, or within 30 days of the end of the foreign tax year and tax payment if the tax is paid annually. Individuals with annual income of RMB120,000 or more must also file an annual return within three months after year-end. Those without a domicile in China or resident for less than one year do not need to file.

 

Domicile and residence

2. What concepts determine tax liability in your jurisdiction (for example, domicile and residence)? In what context(s) are they relevant and how do they impact on a taxpayer?

Domicile

An individual whose domicile is in China is subject to IIT on his or her worldwide income. Individuals falling under this category include those normally or habitually resident in China by reason of residency, family or economic situation. The term habitually resident is a legal definition used to determine whether a taxpayer is a resident or non-resident and does not refer to the actual place where a taxpayer currently resides or is resident within a specified period of time. A student, worker, visitor or tourist for example, that must return to China at the end of his study, work, or visit is deemed a Chinese habitual resident, notwithstanding that he or she may currently be physically outside China.

Residence

Individuals who are not domiciled in China but reside there for one year or more are liable for IIT on their worldwide income. The definition of being resident for one year refers to residency in China for 365 days in a tax year. However, temporary trips out of China do not break the residency period. Temporary trips are defined as absences of less than 30 days in a single trip or not more than 90 days cumulatively over multiple trips during a single year.

 

Taxation on exit

3. Does your jurisdiction impose any tax when a person leaves (for example, an exit tax)? Are there any other consequences of leaving (particularly with regard to individuals domiciled in your jurisdiction)?

No exit tax is currently imposed, but proof of tax payments is required.

 

Temporary residents

4. Does your jurisdiction have any particular tax rules affecting temporary residents?

Income sourced in China of individuals who are not domiciled there but reside for a period of not more than 90 days consecutively or cumulatively in a tax year and paid by a foreign employer (and not borne by the employer's establishment in China) is generally exempt from IIT.

Wages paid to an individual that has resided in China for a period or periods of more than 90 days in a tax year, but less than one year, are taxed irrespective of whether the wages are paid by or borne by a Chinese establishment to the extent such remuneration is for services performed in China.

Individuals who are resident in China for more than one year but less than five years are taxed on foreign-sourced income only to the extent paid by companies, enterprises and other economic organisations or individuals in China, subject to the approval of the tax authorities in charge.

For purposes of determining tax residency, temporary absences (for example, absences of less than 30 days at one time or 90 days in the aggregate in a year) are disregarded. Individuals need to be careful not to run afoul of these rules to avoid taxation of worldwide income.

 

Taxes on the gains and income of foreign nationals

5. How are gains on real estate or other assets owned by a foreign national taxed? What are the relevant tax rates?

Gains realised by a non-resident alien from transferring real estate or other assets are generally subject to income tax at 20%.

 
6. How is income received by a foreign national taxed? Is there a withholding tax? What are the income tax rates?

Income received by non-resident aliens is subject to tax in China based on their residence status (see Questions 4 and 5). Income tax rates are as follows depending on categories of income in question:

  • Wages and salaries: 5% to 45%.

  • Business income: 5% to 35%.

  • Author's remuneration: 14%.

  • Personal services: 20%.

  • Royalties, interest, dividends and bonuses: 20%.

Wages and salaries and other income received by non-resident aliens are generally subject to withholding tax.

 

Inheritance tax and lifetime gifts

7. What is the basis of the inheritance tax or gift tax regime (or alternative regime if relevant)?

No inheritance or gift tax is currently imposed.

Following the rapid growth of China's economy, an affluent group has been formed providing a strong pool of potential taxpayers of inheritance tax. There have been discussions about the imposition of inheritance tax in China among government authorities. The drafting of regulations on inheritance tax was considered a major focus of the tax authorities in the Notice of Major Tasks of National Tax 1996. However, no such tax has been formally introduced, nor has a draft been circulated.

 
8. What are the inheritance tax or gift tax rates (or alternative rates if relevant)?

Not applicable.

 
9. Does the inheritance tax or gift tax regime apply to foreign owners of real estate and other assets?

Not applicable.

 
10. Are there any other taxes on death or on lifetime gifts?

Not applicable.

 

Taxes on buying real estate and other assets

11. Are there any other taxes that a foreign national must consider when buying real estate and other assets in your jurisdiction?

There are various taxes (for example, stamp duty, deed tax, business tax, VAT) that might be imposed depending on the type of assets involved.

Purchase and gift taxes

A recipient of real estate as a gift is subject to income tax at 20% with the exception of the following:

  • The immediate family.

  • Those who are directly obliged to support or raise the donor.

  • Statutory successors or successors designated in wills.

Annual rates

An individual who rents out their own property is subject to real estate tax. The rates vary across China since they are determined by the local authorities.

In Beijing, real estate tax is imposed on owners, users or custodians of houses and buildings at a flat rate of 12% on annual rental income of the leased property or at the rate of 1.2% on the assessed value of self-used property. A discount of 30% on the purchase cost is often offered by the local government in determining the urban real estate tax.

Other

Deed tax is assessed on the transfer of real property at rates ranging from 3% to 5% of the total value of the land use rights or real property transferred payable by the transferee.

Land appreciation tax is assessed on the gain from the transfer of property at rates ranging from 30% for gains below 50%, to 60% for gains of 200% or more (after deduction of reasonable expenses).

Stamp duty of 0.05% on the contact value of a transfer is imposed on both the transferor and transferee. Stamp duty of 0.1% rental amount is payable by both the landlord and tenant.

Urban and township land use tax are imposed on users of urban and township land which vary depending on the type of use, industry and location.

 
12. What tax-advantageous real estate holding structures are available in your jurisdiction for non-resident individuals?

Any foreign enterprise who has set up a branch or representative offices (except enterprises which have been approved to engage in the business of real estate) and any foreign individuals who work or study in China for a stay of more than one year may purchase commercial property for the purpose of self-use and self-occupation only, but cannot purchase commercial property for any other purpose. Foreign institutions without branches or representative offices in China and foreign individuals who work or study in China for less than one year are not permitted to purchase commercial property.

Any purchase of the residential premises by foreign individuals for non-self-use or living is prohibited. Additionally, there are limits on the size of the premises, as only premises falling within the actual scope of an individual's need may be purchased.

The same real property tax rate applies to property owners, including Chinese legal entities, foreign invested enterprises and individuals.

 

Taxes on overseas real estate and other assets

13. How are residents in your jurisdiction with real estate or other assets overseas taxed?

Residents are not taxed on ownership of real estate overseas. Capital gains derived by residents worldwide are generally taxed at 20%.

 

International tax treaties

14. Is your jurisdiction a party to many double tax treaties with other jurisdictions?

As of the end of June 2013, China has concluded 99 tax treaties with its major trading partners (including, the US, UK, France, Germany, Italy, Japan, and Korea) 96 of which have come into effect. In addition, it has special tax arrangements with Hong Kong and Macau.

 

Wills and estate administration

Governing law and formalities

15. Is it essential for an owner of assets in your jurisdiction to make a will in your jurisdiction? Does the will have to be governed by the laws of your jurisdiction?

It is essential for an owner of assets to make a will to dispose of their assets as this provides certainty. The will made by a Chinese citizen is subject to the Inheritance Law of China.

 
16. What are the formalities for making a will in your jurisdiction? Do they vary depending on the nationality, residence and/or domicile of the testator?

The formality requirements for making a will vary depending on the type of wills made.

The following are options provided by the Succession Law:

  • A notarial will should be made by a testator through a notary agency.

  • A testator-written will should be made in the testator's own handwriting and signed by him, specifying the date of its making.

  • A will written on behalf of the testator must be witnessed by two or more witnesses, of whom one writes the will, dates it and signs it along with the other witness or witnesses and with the testator.

A will made in the form of a sound-recording must be witnessed by two or more witnesses.

A testator may, in an emergency situation, make a nuncupative will, which must be witnessed by two or more witnesses. When the situation is over and if the testator is able to make a will in writing or in the form of a sound-recording, the nuncupative will he has made must be invalidated.

Among various methods of establishing a will, notarial wills are easiest to enforce in China and may not be revoked or altered by a testator-written will, a will written on behalf of the testator, a will in the form of a sound-recording or a nuncupative will.

Neither the trust law nor the real property law mandates formality requirements for the creation of a will transferring real property.

 

Redirecting entitlements

17. What rules apply if beneficiaries redirect their entitlements?

Beneficiaries have full rights to dispose of their entitlements. They can accept, or give up the entitlements. They can also transfer their entitlements to others.

 

Validity of foreign wills and foreign grants of probate

18. To what extent are wills made in another jurisdiction recognised as valid/enforced in your jurisdiction? Does your jurisdiction recognise a foreign grant of probate (or its equivalent) or are further formalities required?

For inheritance by a Chinese citizen of an estate outside China or of an estate of a foreign national within China, the law of the place of domicile of the decedent must apply in the case of movable property. In the case of immovable property, the law of the place where the property is located must apply.

For inheritance by a foreigner of an estate within the People's Republic of China or of an estate of a Chinese citizen outside China, the law of the place of domicile of the decedent must apply in the case of movable property. In the case of immovable property, the law of the place where the property is located must apply.

Where treaties or agreements exist between China and foreign countries, matters of inheritance must be handled in accordance with such treaties or agreements.

Validity of foreign wills

The validity of such wills is governed by either:

  • The laws of the habitual residence of the testator when the testament is made or the testator deceases.

  • The country of nationality of the testator.

Validity of foreign grants of probate

Generally, the grant of probate is up to a Chinese embassy or consulate in the place of issue of such grant of probate, unless a consular treaty between the two countries provides for the mutual exemption of certification.

If there are no diplomatic relations between the two countries, the grant of probate is up to the Ministry of Foreign Affairs of that country and the embassy of a third country with which China has a diplomatic relationship.

The successor has to provide to a notary office where that estate is situated all of the following:

  • A certified grant of probate.

  • The death certificate of the decedent.

  • The will.

A Certificate of Rights of Succession will be issued by the notary office on verification of relevant documents and a determination that the content of the will complies with the law.

The successor has to provide to the local estate administration authority relevant documents, including the Certificate of Rights of Succession, to administer the specific estate.

 

Death of foreign nationals

19. Are there any relevant practical estate administration issues if foreign nationals die in your jurisdiction?

There are specific rules on inheritance involving foreign nationals. Different rules apply depending on the nature of the properties involved. In the case of movable property, the law of the place of domicile of the decedent must apply. In the case of immovable property, the law of the place where the property is located must apply. So if the foreign decedent has real estate in China, the administration of his estate should comply with Chinese rules in this respect.

 

Administering the estate

20. Who is responsible for administering the estate and in whom does it initially vest?

Responsibility for administering

Anyone who has in his possession the property of the decedent is responsible for taking good care of such property.

If there is no will, the time and mode for partitioning the estate and the shares must be decided by the successors through consultation. If no agreement is reached through consultation, they may apply to a People's Mediation Committee for mediation or institute legal proceedings in a people's court which will order the party holding the property to administer the property according to the court's ruling.

If there is a will, disposition of the estate must be handled according to the will.

Vesting

There are no specific rules in respect of initial vesting of the estate. Accordingly, the estate would initially pass to the heirs according to the will or be intestate succession. In the event of a challenge, the matter would pass to the People's Mediation Committee or the court.

 
21. What is the procedure on death in your jurisdiction for tax and other purposes in relation to:
  • Establishing title and gathering in assets (including any particular considerations for non-resident executors)?

  • Paying taxes?

  • Distributing?

Establishing title and gathering in assets

If a decedent's estate is partitioned, half of the joint property acquired by the spouses in the course of their matrimonial life must, unless otherwise agreed on, be first allotted to the surviving spouse as his own property. The remainder must constitute the decedent's estate. If the decedent's estate is part of the common property of their family, that portion of the property belonging to other members of the family must first be separated at the time of the partitioning of the decedent's estate.

Procedure for paying taxes

The successor to an estate must pay all taxes and debts payable by the decedent according to law, up to the actual value of such estate, unless the successor pays voluntarily in excess of the limit.

Distributing the estate

Estates that remain after paying taxes and liabilities should be distributed based on statutory succession rules where no will exists or according to the will if there is such an instrument.

 
22. Are there any time limits/restrictions/valuation issues that are particularly relevant to an estate with an element in another jurisdiction?

The time limit for institution of legal proceedings pertaining to disputes over the right to inheritance is two years, counting from the day the successor is or should be aware of the violation of his right to inheritance. No legal proceedings, however, may be instituted after the expiration of a period of 20 years from the day succession begins.

 
23. Is it possible for a beneficiary to challenge a will/the executors/the administrators?

A beneficiary may challenge a will or executors/administrators. The time limit for institution of legal proceedings pertaining to disputes over the right to inheritance is two years, counting from the day the successor became or should have become aware of the violation of his right to inheritance. No legal proceedings, however, may be instituted after the expiration of a period of 20 years from the day succession began.

 

Succession regimes

24. What is the succession regime in your jurisdiction (for example, is there a forced heirship regime)?

China has a statutory inheritance regime, but it also recognises other succession mechanisms (for example, testamentary disposition). There is no restriction on how much of a person's estate can be freely distributed, except that taxes and other debt claims against the estate should be settled first.

 

Forced heirship regimes

25. What are the main characteristics of the forced heirship regime, if any, in your jurisdiction?

China does have a limited forced heirship regime in that a statutory heir (spouse, parent or child) that is unable to support himself is entitled to a portion of the estate sufficient to provide a basic living standard.

While not a forced heirship per se, property acquired during the marriage of a husband and a wife is marital property which is considered to be in their joint possession unless they have agreed otherwise. The succession of such marital property is governed by the succession rules (see Question 21). In the absence of a pre or post-nuptial agreement stating otherwise, a spouse is usually entitled to the joint ownership of the following property acquired by the husband and the wife during the marriage:

  • Wages and bonuses.

  • Proceeds of production and business operations.

  • Income from intellectual property rights.

  • Property obtained from inheritance unless such inheritance is specified for the exclusive benefit of one spouse.

  • Other property acquired during the marriage.

Avoiding the regime

The husband and the wife may conclude an agreement capable of changing the usual practice under the Chinese family law.

The husband and the wife may stipulate (by agreement in writing) that the property acquired by them before or during the marriage must be in their respective possession separately or jointly, or that part of the property must be in their joint possession while the other part may be separate. The agreement is binding on both the husband and the wife and has the same effect as a civil contract. If such an agreement is lacking or unclear, the original rule of joint ownership will apply.

There is little practice of enforcing such agreements and it is likely that an agreement may be successfully challenged by a spouse if it could be considered patently unfair.

Mandatory or variable

Not applicable.

 

Real estate or other assets owned by foreign nationals

26. Are real estate or other assets owned by a foreign national subject to your succession laws or the laws of the foreign national's original country?

This depends on the nature of the assets involved. In the case of movable property, the law of the place of domicile of the decedent must apply. In the case of immovable property, the law of the place where the property is located must apply.

 
27. Do your courts apply the doctrine of renvoi in relation to succession to immovable property?

Foreign laws applicable to foreign-related civil relation should be ascertained by either the:

  • People’s court.

  • Arbitration body.

  • Administrative authority.

Where parties concerned elect to apply laws of a foreign country, they must provide the laws of the country. Where foreign laws cannot be ascertained or where laws of the country involved have no relevant provisions, the laws of China must apply.

 

Intestacy

28. What different succession rules, if any, apply to the intestate?

Provisions on statutory succession apply. Estates of the intestate must be inherited in the following order:

  • Spouse, children, parents.

  • Brothers and sisters, paternal grandparents, maternal grandparents.

  • Successor(s) first in order inherit to the exclusion of the successor(s) second in order. Successor(s) second in order inherit in default of any successor first in order.

  • Successors that are same in order generally inherit in equal shares.

 
29. Is it possible for beneficiaries to challenge the adequacy of their provision under the intestacy rules?

It is possible for beneficiaries to challenge the adequacy of their provision under the intestacy rules.

 

Trusts

30. Are trusts (or an alternative structure) recognised in your jurisdiction?

Trusts are recognised in China. Under Chinese laws, trusts refer to the act in which the settlor, on the basis of confidence on the trustee, entrusts certain property rights it owns to the trustee and the trustee manages or disposes of the property rights in its own name in accordance with the intentions of the trustor and for the benefit of the beneficiary or for specific purposes.

Type of trust and taxation

The only type of special trusts provided for under Chinese laws is a charitable trust. Trusts are currently not subject to taxation in China.

Residence of trusts

Not applicable.

 
31. Does your jurisdiction recognise trusts that are governed by another jurisdiction's laws and are created for foreign persons?

There are no specific provisions in this respect. Under Chinese law, inheritance of a movable estate must be governed by the law of the place of domicile of the decedent and inheritance of an immovable estate must be governed by the law of the place where the property is located in general.

 
32. What are the tax consequences of trustees (for example, of an English trust) becoming resident in/leaving your jurisdiction?

A trustee will generally be subject to tax in China on their worldwide income when he becomes a Chinese resident. A trustee who loses Chinese residence status will generally be taxed on income from Chinese sources only.

 
33. If your jurisdiction has its own trust law:
  • Does the law provide specifically for the creation of non-charitable purpose trusts?

  • Does the law restrict the perpetuity period within which gifts in trusts must vest, or the period during which income may be accumulated?

  • Can the trust document restrict the beneficiaries' rights to information about the trust?

Purpose trusts

Both charitable and non-charitable trusts are recognised under Chinese laws.

Perpetuities and accumulations

There are no specific provisions in these respects.

Beneficiaries' rights to information

The beneficiary of a trust has the right to know how the trust property is managed, utilised or disposed of and related income and expenses. The beneficiary also has the right to ask the trustee to provide explanations in these respects.

Furthermore, the beneficiary has the right to audit or copy the trust books of account and other documents relating to the handling of trust affairs.

 
34. Does the law in your jurisdiction recognise claims against trust assets by the spouse/civil partner of a settlor or beneficiary on the dissolution of the marriage/partnership?

There are no specific provisions in these respects.

 
35. To what extent does the law of your jurisdiction allow trusts to be used to shelter assets from the creditors of a settlor or beneficiary?

Trust property is generally separated from other property of the settlor. After the trust is established, if a settlor dies or dissolves or becomes bankrupt and if the settlor is the only beneficiary, the trust must terminate and the trust property becomes part of his estate or liquidation property. Trust property is generally sheltered from creditors unless the creditor has established a priority claim against such property before the trust was created and has exercised such right.

 

Charities

36. Are charities recognised in your jurisdiction?

There is no answer content for this Question, as it is a new addition to the template that did not exist at the time of writing.

 
37. If charities are recognised in your jurisdiction, how can an individual donor set up a charity?

There is no answer content for this Question, as it is a new addition to the template that did not exist at the time of writing.

 
38. What are the benefits for individuals when setting up charitable organisations?

There is no answer content for this Question, as it is a new addition to the template that did not exist at the time of writing.

 

Ownership and familial relationships

Co-ownership

39. What are the laws regarding co-ownership and how do they impact on taxes, succession and estate administration?

Co-ownership includes tenancy in common and joint ownership.

In tenancy in common, each owner is regarded by the law as owning separate and distinct shares of the same property. The property forms a separate estate and is separately taxed.

In joint ownership, each owner is regarded by the law as owning the same property in its entirety. The property is transferred only in its entirety and is therefore taxed accordingly. On the death of one owner, the property passes by law to the other joint owners.

 

Familial relationships

40. What matrimonial regimes in trust or succession law exist in your jurisdiction? Are the rights of cohabitees/civil partners in real estate or other assets protected by law?

Only traditional marriage is recognised in succession law.

 
41. Is there a form of recognised relationship for same-sex couples and how are they treated for tax and succession purposes?

Same-sex marriage is not recognised.

 
42. How are the following terms defined in law:
  • Married?

  • Divorced?

  • Adopted?

  • Legitimate?

  • Civil partnership?

Married

Marriage is defined as the voluntary union of a man and a woman properly registered according to law.

Divorced

Divorce is defined as the dissolution of a marriage properly registered according to law.

Adopted

Adoption is defined as a specified minor maintained by a specified non-parental adult under an arrangement registered with the civil affairs department of the people's government at or above the county level.

Legitimate

Legitimate children are defined as those who are born in wedlock.

Civil partnership

Same-sex marriage is not recognised in China.

Minority

A minority is defined as under the age of 18 years.

 
43. What rules apply during the period when an heir is a minor? Can a minor own assets and who can deal with those assets on the minor’s behalf?

A minor of ten or more years of age is a person of limited capacity for civil acts and may engage in civil activities commensurate with his age and intellect. In other civil activities, he is to be represented by his legal agent or obtain the consent of the legal agent.

A minor under the age of ten years is a person of no capacity for civil acts. Civil activities are to be carried out on his behalf by his legal agent.

 

Capacity and power of attorney

44. What procedures apply when a person loses capacity? Does your jurisdiction recognise powers of attorney (or their equivalent) made under the law of other jurisdictions?

Any person with mental incapacity for civil acts must be represented in his civil activities by his legal agent. Further, the guardian of any person of limited or no capacity for civil acts is that person's legal agent.

Guardianship of such person must be taken by his spouse, parents, children who have attained majority, other close relatives or friends, or the person's employer or the neighbourhood or village committee of the locality in which such person is domiciled.

A guardian must protect the incapacitated person, his property and other legitimate rights and interests of his ward.

Proposals for reform

There have been suggestions to impose an estate tax in China, but no formal proposal has been made public so far.

 

Contributor profiles

Stephen Nelson, Partner

DLA Piper, Hong Kong

T + 852 2103 0880
F + 852 2810 1345
E stephen.nelson@dlapiper.com

Languages: English, Mandarin Chinese, French (conversational).

Professional qualifications. California Bar, US, 1986; Hong Kong Solicitor, 2009

Areas of practice. Chinese and international tax; China foreign direct investment and M&A.

Recent transactions

  • Advised on pre-IPO tax and wealth planning for Chinese nationals.

  • Advised on long-term tax planning and expatriation for Chinese nationals with US citizenships and residencies.

Publications. Mr Nelson has authored a significant number of articles on Chinese investment and taxation law, and has also contributed to several books on the subject.

Todd Wang, Of Counsel

DLA Piper, Hong Kong

T + 852 2103 0539
F + 852 2810 1345
M + 852 9199 0698
E todd.wang@dlapiper.com

Professional qualifications. New York, US, 2003

Areas of practice. Chinese and international tax; China foreign direct and M&A.

Recent transactions

  • Advised high-net worth individuals on setting up offshore trust structures.

  • Advised on long-term tax and wealth planning for Chinese nationals.


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