6

I’ve been working in Shanghai, China for an American consulting company for the last year and a half. Because their Chinese studio is technically a Chinese company, I'm paid in RMB and I pay Chinese tax.

When I file US taxes, I got the foreign earned income exclusion because I spent more than 330 consecutive days outside of the country and was paid by a foreign company.

Today, I was approached by an American company that needs someone located in Shanghai to help set everything up here before we convert to a Chinese company as well. Because I will now become an employee of a Massachusetts, US company, on an "indefinite business trip" to Asia, my understanding is I will be paying "effectively" very little tax ((Salary - Earned Income Deduction) * Whatever the tax rate is for my tax bracket on the remainder - any additional deductions I have).

From my understanding, I will not need to pay Chinese tax either since I’ll be here on a business visa working for an international company and paid outside the country.

In terms of tax benefit for me, this offer seems too good to be true.

If that is true, should I convince the US company to withhold less? Or just claim it back at the end of the year just in case I do spend more than 35 days in the country.

Edit: We went through a firm and are having them do everything for me. In the end, I need to pay Chinese income tax once our WFOE is setup. Until then, I'm on vacation. Thanks for everyones help. :P

Improve this question
2

2 Answers 2

Reset to default
5

As you know, because you have a history of being able to claim the FEIE and continue to reside in China, you meet the bona fide and physical presence tests for the FEIE. You of course must meet these tests every time you want to claim the exemption. But that's not what you're asking about.

Can income from a US employer to a US employee count as "foreign earned" for the purposes of this tax exemption?

Yes, provided that your tax home is in a foreign country. From the IRS:

Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Having a "tax home" in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes.
...
You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. However, your abode is not necessarily in the United States while you are temporarily in the United States. Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling.
...
The location of your tax home often depends on whether your assignment is temporary or indefinite. If you are temporarily absent from your tax home in the United States on business, you may be able to deduct your away from home expenses (for travel, meals, and lodging) but you would not qualify for the foreign earned income exclusion. If your new work assignment is for an indefinite period, your new place of employment becomes your tax home, and you would not be able to deduct any of the related expenses that you have in the general area of this new work assignment. If your new tax home is in a foreign country and you meet the other requirements, your earnings may qualify for the foreign earned income exclusion.
If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. If you expect it to last for more than 1 year, it is indefinite.
If you expect your employment to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes. For guidance on how to determine your tax home refer to Revenue Ruling 93-86.

It sounds like:

  • You live in China
  • You became an employee of a US company
  • For your new duties, you are posted in China indefinitely
  • You reasonably expect to be so posted for more than one year

If this is the case, your tax home is China, and your income is eligible for the FEIE. The IRS even gives an example which is helpfully relevant:

For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. In November of last year your employer transferred you to London, England, for a minimum of 18 months to set up a sales operation for Europe. Before you left, you distributed business cards showing your business and home addresses in London. You kept ownership of your home in Toledo but rented it to another family. You placed your car in storage. In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London.
Shortly after moving, you leased a car, and you and your spouse got British driving licenses. Your entire family got library cards for the local public library. You and your spouse opened bank accounts with a London bank and secured consumer credit. You joined a local business league, and both you and your spouse became active in the neighborhood civic association and worked with a local charity. Your abode is in London for the time you live there, and you satisfy the tax home test in the foreign country.

You can meet the tax home test even if your employer is a US company paying you in US dollars.

From my understanding, I will not need to pay Chinese tax either since I’ll be here on a business visa working for an international company and paid outside the country.
In terms of tax benefit for me, this offer seems too good to be true.

It seems too good to be true because it is. You're living in China, interacting with the local economy, and earning your money there. You need to pay Chinese income tax. It seems like you don't "need" to because it will be difficult for the Chinese authorities to monitor your income stream from the US source. But tax dodging is unwise, especially since you're there to start a Chinese company. You'll, at a minimum, face some difficult questions from the Chinese government if you don't scrupulously do things above board.

Improve this answer
3

If you meet the physical presence test, you are entitled to the exclusion regardless of the visa you are on. I can't answer with respect to your Chinese tax obligation. There are many countries that do not have an income tax; were you to work in one of them and meet the physical presence test and your income was under the excludable limit you would not owe income tax to anyone. If you don't meet the physical presence test, you probably would not qualify as a bona-fide resident because, as you point out, you are in China temporarily. If that temporary status persists for more than a year, you might have a claim. Some countries issue business visas for multiple year periods.

Improve this answer
4
  • This doesn't answer the question, because you only mention the test that determines whether or not he's residing in a foreign country. There's also the question of tax home and whether or not income from a US employer to a US citizen can count as foreign earned. The primary difference is that salary now comes from a US company instead of a foreign one. Phil already met the test you discuss for a long time; that's not at issue.
    – Esoteric Screen Name
    Commented Apr 9, 2015 at 1:03
  • In order to claim the foreign income exclusion, the fact that the income comes from a U.S. payor is irrelevant. His salary does not have to be handed to him in cash in China; it can be paid into a U.S. bank by a U.S. employer and he is still able to claim the tax exclusion because he meets the physical presence test. There are two tests, physical presence or bona-fide resident, for the section 2555 exclusion. He doesn't qualify for the latter; he does for the former. Therefore the exclusion is available to him.
    – user26732
    Commented Apr 10, 2015 at 9:49
  • What you say is (almost completely) correct but also incomplete. Read the IRS site linked in my answer. Being able to claim the exclusion depends on more than just residency (which what the physical presence and bona fide tests are for). There is also the question of tax home and length of stay, which you don't discuss. For example, someone who took a business trip to China with a planned duration of 11 months cannot claim the exemption, even though they meet the physical presence test. But the logic in your comment incorrectly suggests otherwise.
    – Esoteric Screen Name
    Commented Apr 10, 2015 at 12:26
  • That's because I used the term "residency" not as a term of art but in the general sense. As you point out, residency is not the equivalent of "domicile." Rahm Emanuel was a resident of Washington, D.C. but retained his domicile in Chicago. An individual who planned on staying only eleven months abroad would be wise to arrange his tax affairs to that he qualified for the test. Unless, of course, he had designs on elective office in the U.S.
    – user26732
    Commented May 14, 2015 at 18:45

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.