It has now been four months since the new Individual Income Tax Law has come into force when on 31 August 2018, the Standing Committee of the People’s Congress approved amendments regarding to the old IIT law announcing it as effective staring on 1 January 2019.
From a general point of view there are four main topics affected by the measure and they mostly refer to:
Article 1 of the IIT Amendment defines as “tax resident”:
The new 183-day threshold replaces the previous “full year of residence” discriminant so that it now takes the span of 6 months presence in China to be considered resident and potentially taxed on global income.
The old “5-year rule” is now officially extended to the new “6 years rule” since the first day of 2019. Without any further reference to data collected before 01/01/2019 for taxpayers who broke the rule or not, Foreigners living and working in mainland China for consecutive 6 years (i.e. more than 183 days/year) shall be subject to Global Taxation in China, no matter where their income was generated. The clock can be stopped and reset by only leaving China for 30 consecutive days (no more measures for 90 cumulative days/year) with the duration of that stay to account for 24 hours in order to count as a whole day, in other word an exit or a day out of China of less than 24/hours will not be counted as 1 or half day.
On 14 March 2018, the Ministry of Finance together with the State Taxation Administration released an announcement (Notice No. 34) mentioning that the records on the number of years spent by non-domiciled taxpayers (foreigners) before January 2019 is reset to zero since 16/03/2019 and with effect from 01/01/2019.
|China Presence for more than 6 years without 30 days break||Less than 6 years presence or 6 years+ with 30 days break.||Tax Declaration Date|
|Domiciled Individual holding Chinese Household Registration (Hukou)||Taxed in China on its global income||6 years rule doesn’t apply||Between 1st March to 30th June of the following year (Deduct RMB60,000 and any other extra deductions)|
|Non-domiciled individual (China presence for more than 183 days/year)||Taxed in China on its global income||Taxed in China on its China Income only||Between 1st March to 30th June of the following year (Deduct RMB60,000 and any other extra deductions)|
|Non-domiciled individual (China presence not reaching 183 days/year)||Taxed in China on its China Income only||6 years rule doesn’t apply||Monthly or pay-per-view (Deduct RMB5,000/month tax exemption but no other deduction available)|
*Taxable year is every year form 1 January to 31 December.
Tax exempted income is now increased and made equal for foreign and Chinese nationals passing from RMB4,800 and 3,500 respectively to RMB5,000 per month. The exemption applies both to domiciled and non-domiciled individuals and for gross salaries equal or lower than RMB5,000 IIT obligations are set to zero. The figures of tax exempted laborers now amounts to 80 million units following a news release by Caixin.
The previous distinction between wages and salaries vs. service, author and royalties remuneration is now eliminated, all those four types of personal income are now all included in the so-called “Comprehensive Income” subject to seven brackets of progressive rates (3 to 45 per cent). Targeted income ranges in brackets below 30% are now adjusted as showed in the below table releasing new tax cuts for the middle-low classes of taxpayers:
|Rates||Quick Deductions||Yearly||New Brackets||Previous Brackets|
|3%||0||36,000||Less than or = 3,000||Less than or = 1,500|
|10%||2,520||36,000-144,000||3,000 – 12,000||1,500 – 4,500|
|20%||16,920||144,000-300,000||12,000 – 25,000||4,500 – 9,000|
|25%||31,920||300,000-420,000||25,000 – 35,000||9,000 – 35,000|
|30%||52,920||420,000-660,000||35,000 – 55,000||35,000 – 55,000|
|35%||85,920||660,000-960,000||55,000 – 80,000||55,000 – 80,000|
|45%||181,920||Greater than 960,000||Greater than 80,000||Greater than 80,000|
Following the Notice on “Convergence Issues under Preferential Policy”, one-off lump-sum year-end bonus and stock options plans for Chinese and Foreign Personnel do not need to be included into comprehensive income calculations until 31 December 2021, unless taxpayers wish to do so.
Starting with January 2022 the new regime will be applicable to all income and any separation between stock options, bonus and salary will be fiscally neutral with no tax-saving effects.
Year-end bonuses will be thus subject to IIT following the below formula:
Tax payable on year-end bonus = Taxable annual bonus amount * Applicable tax rate – quick deduction
Following a more fair treatment of foreign and Chinese nationals under IIT treatment, deductions for resident taxpayers (domiciled and non) now include the below categories for both:
To understand the practical effect of the new deductions, let us consider that a resident taxpayer with child (from pre-school to PHD education) can enjoy maximum RMB1,000.00 tax deduction per month. Both parents can either decide who will get the whole deduction or they can choose to deduct RMB500.00 each. If the son is a continuing education student and a taxpayer himself, he can choose to enjoy the deduction himself instead of leaving it to his parents.
|Children’s education||Every child||1,000|
|Continuing education||Diploma education (inside China)/Non-diploma education
(Chinese National vocational/professional qualification only)
|400 per month (maximum 48 months, 3,600 in qualification effective year)|
|Mortgage expenses (Housing loan interest)||First house||1,000 (maximum 240 months)|
Big cities (with huge population)
Mid-size cities (over one million Huko population)
Small cities (less one million Huko population)
|Treatment for serious disease||Medical bills over 15,000 RMB/year||Deduct up 80,000 per year|
|Early care||Parents aged 60 or older||2,000|
Foreign employees used to enjoy tax exempted allowances on selected categories of expenses, the only limitation being the actual existence of those costs and the arm length principle for the reasonableness of their total amount:
After the reform and until 31 December 2021, foreign employees can still get to choose between tax free allowances and new special deductions, however a forced transition to special deductions shall take place beginning with 01 January 2022.
Above all, the formula to calculate one’s taxable income from 2019 onward is:
(Monthly income – Social Insurance –Deductions – Exemption) * New Rate – Quick Deduction
New guidelines from the Tax Bureau point out that monthly income in the form of wages shall be declared on the same period in which it is originated. However, many companies still pay and declare salaries within 10 to 15 days delay due to contractual payment terms
As solution, enterprises have already started to revise their labor contracts and company handbooks in order to clear wages within the last day of the month. Initially another possible solution was to delay the declaration of 1 month, an option that was ruled out by China tax authorities. For income deriving from personal services, royalties and authors’ remunerations the timeline for declaration is now limited to the same month in which those earnings actually happen.
In conclusion, China’s individual income tax (IIT) reform marks as a milestone for the legislator’s influence on the private and real economy. It already affects nowadays almost every taxpayer and employer holding staff in China and it definitely benefit the middle and low working class labor force by increasing items for personal deduction with relevance to nowadays society (mortgages, medical bills and elderly care are a given for most). Finally, the IIT also clarifies the definition of “resident” and “non-resident” taxpayers harmonizing the global effect of OECD rules on personal income and the application of DTAs signed by Western and developing countries symbolizing a new era for the application of internationally-recognized standards of taxation and itemized deductions.
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