China does not have and is not moving toward US style citizenship-based taxation

Readers Digest Version: The Bottom Line Is …

As reported by American Expat Finance, which discusses an interview with Dr. Bernard Schneider of Queen Mary …

You can listen to the podcast …


The Longer Version: “Tax Residency” Based Information Exchange In The 21st Century

The 21st Century has ushered in FATCA, CRS, voluntary disclosure programs and a general awareness of taxation. Many people have been subjected to the FATCA inquisition (“Are you or have you ever been a US citizen?) or a CRS motivated inquiry about “tax residence” (“List all countries where you are a tax resident.”)

In the 21st, the “citizenship by investment industry” is booming. There are many opportunities to acquire (through investment programs) “permanent residency” in a county. (I will refer to these programs collectively as “economic migration”). The value of these “economic migration” programs, to a specific individual, is largely determined by considerations of tax residency.

How Definitions Of Tax Residency Impact The Value Of Citizenships

“Economic migration” programs are of limited value to US citizens because the United States is the only major country in the world, that makes citizenship a sufficient condition for tax residency. To put it simply: wherever a US citizen lives, he is subject to US taxation and ALL the requirements (reporting and penalties) found in the Internal Revenue Code. In a global world, US citizenship-based taxation has significantly diminished the value of US citizenship.

The practical impact of US citizenship-based taxation is that:

The United States is imposing worldwide taxation, according to US tax rules, on people who earn NO INCOME in the United States are and are “tax residents” of other countries. For example, a US citizen living in Canada, who has never lived in the United States and has no US source income, is subject to US taxation! Hard to believe, but true.

Recent Media Reports Imply That China May Be Moving Toward Citizenship-based Taxation

There has recently been a flurry of blog posts and news reports focusing on China’s efforts to impose Chinese taxation on Chinese citizens living outside of China. These reports imply (although usually don’t explicitly state) that China is emulating the United States and moving toward a system of citizenship-based taxation. The reasoning in the articles appears to be somthing like this:

1. China is imposing taxation on people who are Chinese citizens who are living outside China.

2. Citizenship-based taxation is a system that imposes taxation on citizens living outside a country.

Therefore, China has citizenship-based taxation.

China Does NOT Have And Is NOT Moving Toward Citizenship-based Taxation

China does not have a system of citizenship-based taxation and there is no evidence that China is moving in that direction. China appears to be imposing taxation based on domicile in China. There are people who are domiciled in China who live outside China.

The test for tax residency in China is:

People who are either domiciled in China or spend 183 days or more in China are tax residents of China.

There is no mention of citizenship.

An Interview With Dr. Bernard Schneider

The above tweet references an article from American Expat Finance, referencing an interview with Dr. Bernard Schneider in which Dr. Schneider confirms that “tax residency” in China is NOT triggered by citizenship. The article references the following podcast in which I interviewed Dr. Schneider.

Conclusion: The United States is the only major country in the world which maintains the “original sin” of citizenship-based taxation. China is not even close.

John Richardson – Follow me on Twitter @ExpatriationLaw

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