1. The Meaning of Double Taxation
In international immigration and investment, one often encounters situations where taxes are paid in the home country and then again in the immigration or investment country. In tax law, this is referred to as "double taxation." Whether the tax burden of double taxation is heavy depends on the tax systems and rates of the home country and the immigration or investment country.
2. The Origin of Double Taxation
Due to the vast differences between the tax systems of China and the United States, and the different tax habits of the people in both countries, the U.S. tax system is based on citizenship, taxing U.S. persons (citizens, Green Card holders, and tax residents) on their worldwide income, while taxing non-residents and foreigners on their U.S.-sourced income. Although China also adopts a citizenship-based tax system, it only taxes its own residents on their worldwide income and taxes non-residents on their China-sourced income. When immigrating to or investing in the U.S., the problem of double taxation is most severe. This is because the U.S. not only taxes U.S. persons within the U.S. on their worldwide income, but also imposes taxes on the worldwide income of citizens and permanent residents living overseas. In other words, once you obtain a U.S. Green Card, even if you only report to the U.S. once a year, your salary, interest, dividends, rental income, and stock trading profits in China must all be reported and taxed.
3. Methods to Avoid Double Taxation
In international tax law, citizenship-based tax laws contain provisions for "Foreign Tax Credits" or "Foreign Tax Deductions" to avoid double taxation. The "Foreign Tax Credit" means that when reporting Chinese income to the U.S., you first calculate the tax amount payable to the U.S., and then use the taxes already paid in China to offset the U.S. tax; for every $1 of tax paid in China, $1 of U.S. tax can be offset. The "Foreign Tax Deduction" treats the taxes paid in China as an expense item, deducting it from the Chinese income to arrive at a net amount, which is then multiplied by the U.S. tax rate to calculate the tax payable in the U.S. Except for income tax, other taxes paid in China cannot be used as offsets for U.S. taxes and can only be counted as expense items. When filing personal taxes, other taxes unrelated to business cannot be reported, with the exception of real estate taxes. Income that has already been taxed in China can be offset using the two methods mentioned above when reporting to the U.S. However, which specific method is more tax-efficient can only be determined after calculations by an accountant.
U.S. global taxation is not as terrifying as imagined. As long as you clearly understand the characteristics of the U.S. tax burden and engage professionals to plan your personal assets early, you can cleverly and reasonably avoid double taxation.
