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.