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published on July 4, 2019 | reading time approx. 7 minutes
Since 2018, China has been implementing a series of measures to carry out the full-scale tax reduction policy launched by the Chinese government. Apart from the loosened administration measures on the tax deductible costs and expenses for corporate income tax, significantly reduced effective tax rates for value added tax, the renewed individual income tax law (hereinafter referred to as “New IIT Law”) has also provided a big relief on the tax burden of personal income, to make sure each individual can benefit from the tax reduction policy to a certain extent.
We hereby summarize the main stipulations in the New IIT Law as follows:
An individual who is domiciled in China and who is not no domiciled but has resided in China for accumulatively 183 days or more in a calendar year is defined as a resident taxpayer in China. The other individuals are defined as non-resident taxpayers. The day in which an individual stays in China for less than 24 hours will not be counted as one day in the 183-days threshold. Therefore a usual entry-/ exit- day would not be counted in practically.
A resident taxpayer shall pay individual income tax (hereinafter referred to as “IIT”) on his/her personal income derived from within and outside China, and a non-resident taxpayer is obliged to pay China IIT on his/her personal income derived from China only.
The following progressive tax rate brackets are applied on the annual comprehensive income of a resident taxpayer, which includes wages and salaries, labor remuneration, author remuneration and royalties. Annual taxable income is annual income after standard deduction of RMB 60,000, employee's portion of China social security contribution and special additional deductions.
(Table 1)
Any individual or entity who makes payments of any personal income to a resident taxpayer should be responsible as a withholding agent for IIT. Taking wages and salaries income as an example, withholding agents are required to add up the year-to-date taxable income of wages and salaries, calculate the year-to-date IIT payable with the applicable annual tax rate, deduct the cumulative IIT paid up to the last month, to get the IIT payable of the current month.
The following example could be referred for detailed calculation progress. Employee A has a monthly gross salary of RMB 201.666,75. Considering the monthly standard deduction RMB 5.000 only, the calculation for the monthly IIT payable by the withholding agent is as follows:
Accumulated taxable income: = 201.666,75 - 5.000 = 196.666,75; IIT January = annual accumulated IIT = 196.666,75 * 20% - 16.920 = 22.413,35
Accumulated taxable income: = 196.666,75 + 201.666,75 - 5.000 = 393.333,50; annual accumulated IIT = 393.333,50 * 25% - 31.920 = 66.413,38; IIT February = annual accumulated IIT - paid IIT in January = 66.413,38 - 22.413,35 = 44.000,03
Accumulated taxable income: = 393.333,50 + 201.666,75 - 5.000 = 590.000,25; Accumulated IIT = 590.000,25 * 30% - 52.920 = 124.080,08; IIT March = Accumulated IIT – accumulated paid IIT in January and February = 124.080,08 - 22.413,35 - 44.000,03 = 57.666,70
For resident taxpayers, the following special additional deduction items could be deducted from his/her annual comprehensive income if met with certain conditions:
For resident taxpayers who are foreign expatriates living in China, they can also apply the traditional tax-exempted benefits provided by a Chinese employer as listed below, as a further option other than the above special additional deductions, during a 3-year transition period from January 1st 2019 to December 31st 2021.
As a special relief for resident taxpayers who are not domiciled in China, the New IIT Law upgraded the former Five-year-rule to the current Six-year-rule on their worldwide income tax payment obligation in China, which is, for a resident taxpayer who is not domiciled in China, his/her personal income derived from outside China which is not paid or borne by a Chinese individual or entity can be exempted from China IIT, unless the individual has resided in China for no less than six calendar years before, in each of which he/she resided in China for 183 days accumulatively or more and without leaving China for more than 30 days in a single trip.
If meeting the criteria set out by the Six-year-rule, income such as interest from an overseas debtor, dividend from an overseas investment, rental income from a property located outside China, etc., will not be subject to China IIT, even if the individual becomes a resident taxpayer according to the New IIT Law.
As one of the most eye-catching point, the Six-year-rule counts beginning from 2019. For years prior to 2019, any China residence records will not be considered in the assessment. Even for those who have five-year record under the old IIT Law and already have worldwide income tax payment obligation in China, the six-year-rule will break their worldwide income tax payment obligation starting from 2019, until they reside in China for another six years as explained above, which means, a resident taxpayer without domicile in China will have worldwide income tax payment obligation in China earliest in 2025. Before that, any break of more than 30 days outside China may reset the clock from the very beginning.
The IIT for non-resident taxpayers are still calculated on a monthly basis applying the following monthly progressive tax rates.
(Table 2)
The above tax rates are applicable to wages and salaries, labor remuneration, author remuneration and royalties of non-resident taxpayers. Monthly taxable income is monthly income after deduction of RMB 5,000 (for wages and salaries), 20% deduction of gross income (for labor remuneration and royalties) or 44% deduction of gross income (for royalties).
Some former tax preferential policies are retained by the New IIT Law, at least during the 3-year transition period (January 1, 2019 to December 31, 2021). The former preferential tax calculation method for annual performance-related bonus is still optional for resident taxpayers. The bonus can be taxed separated from the regular monthly wages and salaries and be divided by 12 to determine the applicable monthly tax rate (according to Table 2), which may lower the effective tax rate to a certain extent.
Multi-month bonus received by non-resident taxpayers could also be taxed separately from the regular monthly wages and salaries. It can be divided by 6 to determine the applicable monthly tax rate (according to Table 2).
Share-based incentives received by resident taxpayers could be applied to the annual progressive tax rates (according to Table 1) separated from the regular wages and salaries, while such incentives received by non-resident taxpayers is applied to the similar calculation method of multi-month bonus.
Severance payments may also be taxed separated from regular wages and salaries and applied to the annual progressive tax rates (according to Table 1) independently. Herein a portion of severance payment up to three times of the local annual average salary of the last year is exempted from IIT and only the exceeding amount is taxed.
For individuals without domicile in China but hold an overseas position, the taxation base for China IIT on multi-month bonus and share-based incentives could be further apportioned between China- and foreign-sourced income based on number of working days in and outside China.
For individuals who is not domiciled in China, their taxation base of wages and salaries income can be apportioned following certain rules if they hold dual positions in and outside China or take an overseas position only.
Under the old IIT Law, the applicable marginal tax rate follows the worldwide wages and salaries income. The New IIT Law overturned the old treatment and makes the apportionment on the taxable base directly, which inherits the apportionment logic and furthermore lowers the applicable marginal tax rate as well as the final effective tax rate. The apportionment rules are summarized as follows:
* It is for senior management personnel in a Chinese resident enterprise without considering tax treaty benefit.
The above apportionment rule have differentiated the IIT payment obligations of individuals without domicile in China based on their residence levels, i.e., less than 90 days, from 90 to 183 days, more than 183 days without and with a six-year-record. Individuals should estimate their residence levels in China at each beginning of a calendar year and report to the in-charge tax authority within a certain time limit when the actual level deviates from the estimated level.
Under certain circumstances, the above apportionment rule could have conflicts with the IIT treatment under double taxation agreement between China and a foreign country of which the individual is a resident taxpayer. The New IIT Law has confirmed the prevailing position of double taxation agreement and also set out practical guidance to solve such conflicts, which is purely new comparing to the old law.
After the reformation, the New IIT Law has reduced China income tax burden for all taxpayers with more reasonable rules and provided practical guidance which is easier to understand. On the other side, the more transparent guidance will make the IIT administration and collection by the tax authority more straight forward, especially under the big-data environment.
Still there exist several practical obstacles or uncertainties in terms of tax filing. Until further tax regulations are published, we suggest that individuals or entities in China should keep a timely and smooth communication with the local tax authority to discuss practical details, and if necessary, may seek for professional assistance in this regard.
Vivian Yao
Partner
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Monica Chen
Associate Partner
