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The publication of the Regulations for the Implementation of the Individual Income Tax Law of the People's Republic of China which came into force on 1 January 2019, without a doubt, it has profoundly changed the declaration and computation of Individual Income Tax (thereinafter refers as “IIT”) for both expats and Chinese nationals by introducing new income categories, tax rates and a yearly reconciliation.
Prior to this publication, there were 11 income categories, each with a dedicated tax treatment: in the attempt to simplify tax calculation and declaration, China tax authorities have halved the number of income categories to 9 and introduced the concept of Comprehensive income.
Comprehensive income consolidates salaries and wages, income from labor services, income from manuscript remuneration and income from royalties under the same progressive tax treatment (with 7 tax rates ranging from 3% to 45%) previously limited to salaries and wages.
Following this simplification, taxpayers’ income can be classified as comprehensive income, income from operations (e.g. leasing services), income from interest/stock/dividends, income from lease/transfer of property and other forms of income.
It is worth mentioning that until 31 December 2021 annual bonuses will enjoy a beneficiary tax treatment available for application only once a year, whereas starting from 1 January 2022, such form of income will be inserted in the comprehensive income category, therefore adding one more form of income to the larger “basket” aiming at covering most form of incomes under one, simplified tax treatment.
Further to new income categories and definitions, IIT latest regulations have changed the way such tax is levied and collected over the fiscal year. While before the IIT reform taxpayers would declare and contribute for IIT based on their monthly income, IIT calculation and payment are now based on a cumulative and progressive rate which takes into consideration the total income generated over the year, rather than during each month.
In doing so, taxpayers will declare IIT on a monthly basis and pre-pay due amount according to cumulative tax brackets (7 in total), whereas the tax rate applied on the same monthly income might increase over the year as the cumulative income raises.
Considering the gradual shift to a higher tax rate during the year and that different sources of income might fall into the same income category (e.g. the comprehensive income), tax authorities have introduced a yearly IIT reconciliation due end of the following June in order to give the chance to resident taxpayers to confirm the IIT pre-paid during the year matches the income generated over the same period and, in case of any discrepancy, to rectify such record.
Entwist with the full implementation of the new IIT framework in 2019, the old threshold of 120,000 RMB above which taxpayers were asked to complete an income declaration is now obsolete: the applicableness of yearly IIT reconciliation filing has now been extended to all China resident taxpayers. Latest regulations identify three types of situations in which taxpayers are exempted from yearly IIT reconciliation:
IIT yearly reconciliation procedures play a key role in making sure the IIT prepaid during the year matches the total tax payable calculated on the yearly overall individual income, especially in situations where more than one source of income coexist and/or employees have changed employers during the same financial year.
Employees have the statutory obligation under the IIT law to complete the IIT reconciliation based on his/her cumulative income for the year (unless belonging to the exempted categories aforementioned), and are responsible to handle any difference in the final IIT calculation (i.e. to arrange a top up or a refund). Each employer, on the other hand, shall be responsible for the calculation and declaration of the IIT generated on their own business related activities only (i.e. during provision of wages and salaries), as information on individual income generated from other sources might not be disclosed by individuals to the employer as deemed as confidential information.
The State Taxation Administration published the Consultation draft on the 2019 Annual IIT Reconciliation Filling for Comprehensive Income (thereinafter referred to as ‘Consultation Draft’) where it indicates three ways for taxpayers to proceed the Annual IIT Reconciliation:
Tax authorities have rolled out an official app (个人所得税) aiming at simplifying the reconciliation procedure for all taxpayers in a user-friendly application available for all China taxpayers. Considering the app is a relatively new tax monitoring and management tool, up to date the app is available in a single version for both Chinese nationals and foreigners: the latter must have a China Mainland phone number and will have to attend their local tax bureau to collect a tax identification number which will bypass the unique code available on Chinese ID used by Chinese nationals to login in the app.
Although taxpayers bear the ultimate responsibility in front of tax authorities for the IIT being settled at the year end, taxpayers can delegate their employers (acting as withholding IIT agents during the year) or a professional trusted party to carry out the reconciliation on their behalf by signing a relevant power of attorney to be used upon declaration.
Aiming at attracting and retaining foreign talents in the mainland, the original IIT law published in 1994 granted special IIT exemptions to foreigner on the following expense categories:
The newly published “Trial Implementation” clarifies that the above exemptions will come to an end by December 2021 and shall be replaced with the set of IIT special deductions dedicated to Chinese nationals, thus unifying the deduction process for all taxpayers, regardless of their country of origin.
From 1 January 2022, Chinese nationals and expats will thus have access to the following unified IIT deductions:
The trial implementation affects expats the most, however it offers a simplified tax deduction scheme and tax calculation method for all taxpayers and withholding tax agents (i.e. the employers declaring and prepaying IIT on behalf of their employees): considering the deduction application process will rely on the employee and is to be processed via dedicated app (or at the tax bureau counter), it is essential to establish a solid communication line between employees and employers/withholding agents to make sure all special deductions are in place and respected upon monthly declaration and prepayment.
The new IIT Law defines a China resident taxpayer as either an individual domiciled in Mainland China or a non-domiciled individual who stays in Mainland China for 183 days or more in a calendar year. During the newly introduced IIT reconciliation, Chinese nationals will have to declare and potentially reconcile both China and non-China sourced incomes (i.e. worldwide income taxation).
Understanding whether a foreign national is deemed as a China resident taxpayer plays a key role when assessing the tax payable and the origin of the source of such income. A foreign national is not to be considered as China resident taxpayer in the case he/she spends less than 183 days in Mainland China during the same calendar year and only China sourced income will be subject to IIT.
Counting the days spent in Mainland China for expats each year becomes important also to assess whether non-China sourced income shall be taxable in China, thus becoming a world-wide income taxpayer in China after six consecutive years where a foreigner spends more than 183 days each year in the Mainland without interruptions of more than 30 consecutive days each year:
|Day of presence in China per year (x)||Working abroad||Working Domestic|
|Paid by foreign entity||Paid by PRC entity||Paid by foreign entity||Paid by PRC entity|
|X < 90 days||Tax-free||Tax-free||Tax-free||Taxable|
|90 days < X < 183 days||Tax-free||Tax-free||Taxable||Taxable|
|183 days < X for less than 6 consecutive years||Tax-free||Taxable||Taxable||Taxable|
|183 days < X for more than 6 consecutive years||Taxable||Taxable||Taxable||Taxable|
The six year rule replaces the previous “five- years rule” for nondomiciled individuals, whereas the six years will be counted starting from 1 January 2019 for every nondomiciled individual, thus waiving previous records, and still giving the chance to expats to reset the clock by leaving the country for 30 consecutive days during the same year, or by spending less than 183 days per year in the Mainland.
Taxpayers bear the ultimate responsibility for the annual reconciliation filing of comprehensive income and for the authenticity and completeness of the information submitted.
Beside the fines for omitted or late filing, the personal tax compliance will impact the personal credit rating, therefore requiring a higher level of awareness and knowledge towards tax compliance matters.
In addition to self-reporting taxpayers can engage the withholding agent or a third-party professional to handle the filing smoothly and the tax payment (if any) in time, remaining responsible for the information provided. The supporting documents and data shall also be kept by the taxpayer in case of any tax inspection in the future.
On the other hand, the withholding agent should assist the taxpayer in completing the reconciliation filing by providing the necessary information and handling the process, if requested.
In conclusion, companies shall also be ready for the annual reconciliation filing by implementing a procedure for the collection and maintenance of the documentation and managing the process, seeking for tax and legal advice when necessary.
Interested also in Hong Kong taxes? To read more about Hong Kong tax rates and income tax system.
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