IIT China: Tax Preferential Treatment for Foreign Individuals Continues: Alert under the Good News

published on october 11, 2018 / reading time approx. 2 minutes

The Amendment to the Individual Income Tax Law in China ("Individual Income Tax - IIT") was recently issued, but some topics still need to be further clarified. One of the hot topics is the "resident taxpayer", which is newly defined in the new IIT law and will have significant influence to the tax obligation of foreign individuals in China.

According to the Amendment, any individual is defined as Chinese tax resident, if he has a domicile in China or who has no domicile but has stayed in China for 183 days or longer in a single tax year is considered as Chinese tax resident.

Then the question comes whether a foreign individual shall pay Chinese IIT on his worldwide income as long as he stays in China longer than 183 days?

On September 30, 2018, the responsible person from Chinese tax authority has replied this question: Under current IIT implementation rules, there is a special regulation for foreign individuals. For an individual who has no domicile in China but stays in China between one and five years, only China sourced income is subject to Chinese IIT ("Five-Year Rule").

In order to maintain the stability of policy, the preferential regulations for foreign individuals will continue to be considered in the next step of implementation of the new IIT law.

Even though the response from the tax authority has relieved the nerves of many foreign individuals, from a long-term view, the new definition of resident taxpayer will undoubtedly have an impact to the foreign individuals. Under the current IIT law, a foreign individual can avoid the consequences of the "Five-Year Rule" by leaving China for 30 days in one trip or accumulative 90 days in several trips in a tax year. Comparing to the current IIT law, the new regulation will be tightened and the possibility under the new law will obviously decline, if the foreign individuals want to break the "Five-Year Rule".

Foreign individuals with long stay in China should actively follow up the new implementation regulations and to consider whether it is necessary for them to break the "Five-Year Rule" according to their actual situation before commencement of the new law and to make arrangements accordingly.

It is still not clear whether the above replied preferential regulations will still cover the tax exempted benefits on reimbursement basis for foreign individuals. It still needs to be further clarified by the new IIT implementation rules.