China: Important Changes in Annual IIT Reconciliation for foreign-sourced income

In 2020, SAT had already published special administrative measures to regulate the IIT filing for foreign-sourced income of resident individuals in China. The Measures now emphasize for the first time that foreign-sourced income shall be included in the scope of the annual IIT reconciliation.  This underscores China's commitment to taxing foreign-sourced income since joining the Common Reporting Standard (CRS) in 2015.

For the first time, the Measures introduce the possibility of an extension for filing the annual IIT reconciliation. This is a significant step, primarily aimed at the tax filing of foreign-sourced income.

For example, if a Chinese resident taxpayer (natural person) who derives income from Germany is subject to German IIT, the German IIT paid is allowed to be credited against his/her Chinese IIT payable of the same tax year, in accordance with the stipulations by the relevant Chinese tax regulations. However, usually the German income tax declaration may be completed after one or two years after the tax year. In such cases, there are two options for the taxpayer to finally claim the tax credit on the Chinese IIT payable:

Apply for an extension of the annual IIT reconciliation according to the Measures. The exact duration of the extension is yet to be confirmed; or File the annual IIT reconciliation, including foreign-sourced income, within the prescribed period and retroactively apply for the tax credit after obtaining the German IIT payment certificate, but no later than five years after the relevant tax year.

It is important to note that resident taxpayers without a domicile in China may first do a check on whether the “six-year-rule”​ applies. The purpose is to determine the declaration scope of their foreign-sourced income. 

Resident taxpayers with dual positions in China and abroad need to sort out their dual salary income and their travelling records of entering and leaving China, as well as consider the applicability of tax treaty benefits, and then choose the correct calculation formula for IIT filing.

On the other hand, if the taxpayer chooses to apply for an extension in accordance with the Measures, the taxpayer shall first pay provisional taxes based on either the actually paid IIT in the previous annual reconciliation or the tax amount determined by the tax authority, and complete the annual IIT reconciliation within the approved extension period afterwards.

It has always been required that taxpayers and withholding agents who are entrusted (in writing) to handle annual IIT reconciliation on behalf of the tax taxpayers shall retain the documents related to comprehensive income, relevant deductions on taxable income and tax incentives for five years from the end of the annual IIT reconciliation period.

We observe that the Chinese tax authorities have substantially enhanced the collection and administration for tax on the income of resident individual taxpayers, with higher compliance requirement for taxpayers, their withholding agents, especially for taxpayers with foreign-sourced income. Therefore, more importance should be attached to both regulatory and practical studies, cross-border tax planning, risk pre-assessment and avoidance in this regard.​​