US-China Tax Treaty article 6 and article 22

[Taylor2025]

Hello Everyone,

Could you please help on below questions regarding US-China Tax Treaty article 6 and article 22?

My friend is resident alien, she has a rental property in China, she already paid property tax and rental income tax in China.

If she paid $300 income tax to China, however based on 1040 Schedule E, the income tax for this rental property to US is $800 [Maybe because of different tax benefits or different tax rate or different calculation], does she have to pay the difference $500 to US? I understand that she can take foreign tax credit, and how much of the foreign tax credit she can use for this rental property?

According to US-China Tax Treaty article 6 and article 22, not sure which way is correct, she only needs to report this tax and doesn't need to pay extra $500, or she need report this tax and, in the meantime, she has to pay extra $500 to US?

Also above is an example based on she has the tax invoice from China tax bureau, and in the previous years, individual who owns real property which rented out, China tax bureau only charged fees instead of tax and no invoices or receipts she can find, how can she report?

Thank you very much. Have a great day.

[tagteam]

@pk?

[pk · Accepted solution]

@Taylor2025 , having read through your post and refreshing my memory of US-PRC Tax Treaty, I would say the following:

(a)  under article 6, Chine where the property is located  has a right ( not exclusive ) to tax the income from letting the asset.

(b) article 22  shows  the mechanism to be used by each contracting state to ameliorate the effects of double taxation.  US in particular does recognize the total; amount of taxes paid to another contracting state   on income  taxed by both countries.  But the rub is how US does it.

(c) The  foreign tax credit ( form 1116 ), while recognizing  dollar for dollar foreign taxes paid or levied,  limits  the allowable amount  for the tax year based on essentially a ratio of foreign income to  World income.. The rest being available for  carry back or carry forward  but again  limited by the ratio mentioned above.

(d) Or  one can take a deduction of the full amount of foreign taxes  paid   when one itemizes and  but again limited by  State and Local Taxes ( SALT ) limitation  of US$10,000.

(e) On US taxes on Schedule-E income  ( Supplementary income such as rental income ), and recognizing rental income, allowed expenses , property taxes, dues, legal fees  etc. and depreciation etc. one ends  up with an amount of income that is taxed as ordinary income ( marginal rate ).  That is part of the total taxes due for  Federal purposes.  This is reduced by Foreign Tax Credit allowable for the year.

I  don't have  direct knowledge  of whether China allows  depreciation of asset  but in my experience  ( unless the world income pushes  one into very high . bracket ) generally US federal taxes are reasonable 

I hope I have answered your query as completely I can .     If there is more I can do , please feel welcome to add to this thread.

pk

[Taylor2025]

@pk 

Thank you so much for your reply, it’s already helped me a lot.

China tax bureau gave individual tax benefit for renting residential property, which is very lower tax rate and, in the meantime, just collecting half of the total tax with that lower rate, that’s why in the example I only named $300 as rental income tax to China.

However On US taxes on Schedule-E income, after deducting expenses, property taxes, dues, and fees, depreciation,etc, the net rental income from Schedule E will still increase her AGI compared with previous years without this rental income, the increased AGI which increased her tax liability I just named it $800, I also filled out a draft version form 1116 and 1040, according to US tax Schedule-E and from 1116 foreign tax credit, she still owed $500, as I stated, that’s because of different tax rate, different tax benefits, and different tax rules between China and US, so the question is based on US-China tax treaty, does she still need to pay this $500 to IRS? Or can she just report that she already paid $300, and eliminated $300 in form 1116 and let $500 alone?

Thank you very much.

Have a great day.

[pk]

@Taylor2025 , I am sorry for the confusion -- I gave you all the back ground ( to make sure that you are using all the deductions allowed per the US tax laws, but did not answer the question directly.

As an US  person ( citizen / GreenCard / Resident for Tax purposes ), you are taxed on world income and you must recognize/ enter  all incomes. 

You must compute the US taxes based ONLY on US tax laws.

Your credit for taxes paid to another tax jurisdiction is separate  and may or may not put you in  a neutral tax position ( i.e. foreign taxes paid neutralizing US taxes on the same income ).

Does this make sense ?   Is there more I can do for you ?

pk

[Taylor2025]

@pk 

Thank you very much.