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FINANCE: More Foreign Teachers in China May Have the Opportunity to Enjoy Tax Treaty Benefits
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More Foreign Teachers in China May Have the Opportunity to Enjoy Tax Treaty Benefits

By Kelvin Lee/Sophia Li, PwC Tianjin


BT 201703 fINANCE 02Pursuant to the general provision in the relevant Teacher Article in the DTA, foreign teachers with earnings from teaching, lecturing or research activities at university, college, school or other government accredited educational institutions in China may enjoy the treatment stipulated in DTA provided that the prescribed DTA conditions are met. As this article is not in the OECD Model Tax Convention or the United Nations Model Tax Convention, there are no international common practices and standards applicable to the interpretation of this article.


For standardizing the implementation of the Teacher Article, the SAT had successively issued Caishuixiezi [1986] No. 30, Guoshuifa [1994] No. 153 ("Circular 153"), Guoshuihan [1999] No. 37 ("Circular 37") and the SAT Public Notice [2011] No. 42. Among these, there are two with content pertinent to PN91:


Circular 37: Clarifying that "universities, colleges, schools or relevant educational institutions" mentioned in DTAs are those colleges or above higher educational institutions which offer full time curriculum accredited by the MOE which have obtained approval from the State Administration of Foreign Experts Affairs ("SAFEA") to employ foreign teachers and researchers. In other words, eligible educational institutions should firstly be those that are qualified to employ foreign teachers and secondly should also be higher educational institutions which offer college degrees and above.


Circular 153: Stipulating that in handling of DTA treatment, the requirements of (Waizhuanfa [1993] No. 357) should be observed, i.e., foreign teachers should submit copy of .


Over the past few years, schools of different types and levels (not limited to higher education) have increased their hiring of foreign teachers. Hence, Circular 37's interpretation of eligible educational institutions seems to be too narrow; some taxpayers also think its clarification is in discord with DTA's literal meaning. Moreover, the as required for submission by Circular 153 no longer exists in practice and has been replaced by some other certificates. In view of all these, the SAT issued PN91 mainly to expand the scope of educational institutions eligible for the DTA's teacher treatment and also to update the documents required for submission for enjoying DTA treatment.

BT 201703 FINANCE 01
Expanding the scope of eligible educational institutions
PN91 redefines the DTA's applicable scope of universities, colleges, schools or relevant educational institutions for China to include "schools offering pre-school education, elementary education, secondary education, higher education and special education; specifically including kindergartens, primary schools, adult primary schools, junior high schools, vocational junior high schools, senior high schools, adult senior high schools, secondary vocational schools, adult secondary vocational schools, vocational senior high schools, technician schools, special education schools, schools for children of foreign nationals, colleges, vocational (professional) colleges and adult education colleges, etc.".


Compared to Circular 37, PN91 has broadened the scope of educational institutions to include those previously ineligible for DTA treatment under Circular 37; such as pre-school education schools (e.g. kindergartens), schools below college level (e.g. elementary and high schools, vocational senior high schools, secondary vocational schools, schools for children of foreign nationals, etc.). Additionally, there is no differentiation between private and public schools, as well as between for profit and non-profit educational institutions in PN91. Therefore, based on the literal interpretation, private schools for profit which meet the prescribed conditions should also fall under the scope of educational institutions eligible for DTA treatment.


However, it is also necessary to pay attention and comply with specific provisions in DTAs which China has concluded with some countries. For instance, DTAs with Hungary, South Korea and Portugal1 specifically state that educational institutions or scientific research institutions have to be non-profit. There are also DTAs with no restriction on the institution employing teachers, for example, Turkey. These specific DTAs provisions mentioned above should prevail over the general provisions of PN91.


PN91 excludes "training institutions" from eligible schools but has not provided any further elaboration on the scope and assessment standards of "training institutions". This may become an issue on implementation. As PN91 already includes an extensive list of examples, some training institutions active in the market such as language training institutions do not fall within the scope of eligible examples list in PN91, and hence foreign teachers working at these institutions may still not be able to enjoy relevant DTA treatment.


New changes to the information required for submission when applying for DTA treatment


The Public Notice Issued by SAT regarding (SAT Public Notice 2015 No. 60, hereinafter referred to as "PN60") in 2015 specifies the forms and information required for submission by non-resident taxpayers for enjoying DTA treatment. On this basis, PN91 additionally requires foreign teachers to provide copy of or or .


The above-mentioned provision is to replace the relevant requirements of Circular 153. According to Circular 153, foreign teachers should submit copy of when applying for DTA treatment. However, in practice, the SAFEA no longer issues such a document.


Also worthy of attention is the and for foreigners working in China before October 2016. For certain selected pilot locations, the SAFEA has uniformly combined and replaced these two documents with since October 2016 and will implement this nationwide from April 1st, 2017 onwards.


Effective Date

PN91 stipulates that its provisions are effective starting from its issuance date and are also applicable to cases which have not been processed before its effective date. Considering the conditions pertinent for DTA treatment provided by PN91 are clearly more favourable than those of earlier regulatory documents, those "not processed" cases thus may have the opportunity of applying DTA treatment retrospectively.


Prevailing tax laws do not have a clear definition of "not processed" case, thus it remains to be clarified whether it includes only those unsettled cases or also those cases where tax has been settled but with outstanding contentious points.

BT 201703 fINANCE 03
The takeaway

Historically, children's education has always been of great importance to Chinese families. With the improvement of living standards and the growing market need of international education, there is an increasing need of foreign teachers as well. The issuance of PN91 is undoubtedly good news to individuals from certain countries teaching in China and to educational institutions for attracting these talents. The main favourable points are as follows:


- Removal of scope limitation of educational institutions eligible for DTA treatment by PN91 can avoid implementation disputes over certain DTA interpretations and strengthen the enforcement certainty of DTA.
- Due to China's previous narrow interpretation on the Teacher Article in DTAs, some foreign teachers could not claim treaty benefits. What's worse is that some of them even encountered issues when claiming foreign personal income tax credit in their resident countries and thus resulted in double taxation. The issuance of PN 91 may help address such issues.
- If foreign teachers are from jurisdictions with lower effective personal income tax rates or they cannot claim full tax credit for their China IIT payments because of those jurisdictions' stricter foreign tax credit rules, qualifying for DTA treatment will help to alleviate their actual IT burden.


When applying PN91 for enjoying DTA treatment, foreign teachers should pay attention to the following four points:


- After PN91 has expanded the applicable scope of DTA treatment, those foreign teachers who were not eligible for DTA treatment under the old rules but are now eligible under PN91 should timely apply for DTA treatment either personally or through their employers.
- DTA treatment for foreign teachers varies among countries with two major types. One is tax exemption period, referring to the prescribed period during which teaching and research personnel may enjoy tax exemption when engaging in teaching and research activities in other contracting country (e.g. 5 years, 3 years or 2 years) e.g. the U.S. Another one is tax exemption condition, referring to cases where teaching and research personnel may enjoy tax exemption when their physical presence for engaging in teaching and research activities in other contracting country do not exceed the prescribed period (e.g. 5 years, 3 years or 2 years) but will be fully subject to tax retroactively from date of arrival once their physical presence exceeds the prescribed period (e.g. Australia). Hence, it is important to understand the provisions of different DTAs and how they are administered.
- Pursuant to the SAT Public Notice [2011] No. 42, DTA Teacher Article is only applicable to those foreign teachers with employment relationship with schools or research institutions in China ("domestic institutions"). Employment relationship means foreign teachers have signed employment contracts with the domestic institutions, or although in the absence of formal employment contracts, they hold position at the domestic institutions and in substance their teaching, lecturing or research activities (including content, form and time) are arranged and managed by domestic institutions. Educational institutions should consider appropriate employment arrangement with foreign teachers to help them secure DTA treatment.
- Procedures for foreign teachers' enjoyment of DTA treatment have been standardized through the issuance of PN60 and individuals are required to provide more information to facilitate the tax authority's subsequent review and management. PN91 clearly requires submission of relevant work permit documents. Hence, it is important for individuals enjoying DTA treatment and their employers to be aware of this regulatory requirement.


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