Written by Victor Herrera

On 31 August 2018, the Standing Committee of the 13th National People’s Congress (NPC) voted and adopted the Amendments to the Individual Income Tax (IIT) Law of the People’s Republic of China. The new IIT Law will be fully enforced starting from 1 January 2019.

The key changes are summarized as follow:

  1. Changes in the definition of Resident

The new IIT Law introduces a new definition for tax residence by shortening the physical presence threshold from “one year” to “183 days”.

  The Current IIT Law The New IIT LAW
Article 1 Individuals who have a domicile in China or individuals who do not have a domicile in China but have resided in China for one year or more shall pay individual income tax in accordance with the provisions of this Law on income derived within and outside China.

 

Individuals who do not have a domicile in China and have not resided in China or individuals who do not have a domicile in China but have resided in China for less than one year shall pay individual income tax in accordance with the provisions of this Law on income derived within China.

Individuals who have a domicile in China, or individuals who do not have a domicile in China but have resided in China for 183 days or more cumulatively within a tax year, shall be deemed as resident individuals. Income derived by resident individuals from China and overseas shall be subject to individual income tax pursuant to the provisions of this Law.

 

Individuals who do not have a domicile in China and have not resided in China, or individuals who do not have a domicile in China but have resided in China for less than 183 days cumulatively within a tax year, shall be deemed as non-resident individuals. Income derived by non-resident individuals from China shall be subject to individual income tax pursuant to the provisions of this Law.

 

Tax year shall start from 1 January and end on 31 December of a calendar year.

Residents shall be the persons who are fully liable for tax payment obligations in a country. Although this is a necessary condition for determination of the identity of a resident, the aforementioned “tax payment obligations” does not equal to de facto tax payments.

Implementation regulations shall be formulated by China’s State Council, under which it will become clear how non-China domiciled individuals who have reached the minimum physical presence threshold are taxed on their China and overseas income.

  1. Combination of active incomes as Comprehensive Income

In the Article 2 of the current IIT Law, there are eleven (11) categories of individual income where individual income tax shall be levied.

The new IIT Law introduces the concept of “comprehensive income” which consolidates the first 4 categories of income, namely 1) wages and salaries, 2) remuneration for personal services, 3) author’s remuneration and 4) royalties.

China tax residents shall consolidate and compute their comprehensive income on an annual basis, while non-residents will be taxed on a monthly or when taxable income arises.

Income from production and business operations of individual industrial and commercial households as well as income from contracted and leasing operations of enterprises and institutions are removed and incorporated into income from business operation.

  The Current IIT Law The New IIT LAW
Article 2 Individual income tax shall be levied on the following categories of individual income:

(1)    Income from wages and salaries;

(2)    Income from production and business operations of individual industrial and commercial households;

(3)    Income from contracted and leasing operations of enterprises and institutions;

(4)    Income from remuneration for personal services;

(5)    Income from author’s remuneration;

(6)    Income from royalties;

(7)    Income from interest, dividends and bonuses;

(8)    Income from lease of property;

(9)    Income from transfer of property;

(10)    Contingent income; and

(11)    Other taxable income determined by the finance authorities of the State Council.

The following income of an individual shall be subject to individual income tax:

(1)    Income from wages and salaries;

(2)    Income from remuneration for personal services;

(3)    Income from author’s remuneration;

(4)    Income from royalties;

(5)    Income from business operation;

(6)    Income from interest, dividends and bonuses;

(7)    Income from lease of property;

(8)    Income from transfer of property; and

(9)    Contingent income.

 

Resident individuals deriving income mentioned in item (1) to item (4) of the preceding paragraph (hereinafter referred to as the “consolidated income”) shall consolidate and compute individual income tax based on the tax year; non-resident individuals deriving income mentioned in item (1) to item (4) of the preceding paragraph shall compute individual income tax on a monthly basis or based on each income item under each category. Taxpayers deriving income mentioned in item (5) to item (9) of the preceding paragraph shall compute individual income tax separately pursuant to the provisions of this Law.

 

  1. New taxable income brackets

For the comprehensive income, the new IIT Law unifies 7 brackets of progressive tax rates from 3% – 45%. Compared to the current schedule of tax rates on wages and salaries, the taxable income brackets of lower tax rates (3%, 10%, 20% and 25%) are adjusted, whereas the taxable income brackets of higher tax rates (30%, 35% and 45%) are unchanged.

The Current IIT Law The New IIT Law Tax Rate
Annual Taxable Income (RMB) Monthly Taxable Income (RMB) Annual Taxable Income (RMB) Monthly Taxable Income (RMB) Tax Rate
<= 18,000 <= 1,500 <= 36,000 <=3,000 3%
> 18,000 to 54,000 > 1,500 to 4,500 > 36,000 to 144,000 > 3,000 to 12,000 10%
> 54,000 to 108,000 > 4,500 to 9,000 > 144,000 to 300,000 > 12,000 to 25,000 20%
> 108,000 to 420,000 > 9,000 to 35,000 > 300,000 to 420,000 > 25,000 to 35,000 25%
> 420,000 to 660,000 > 35,000 to 55,000 > 420,000 to 660,000 > 35,000 to 55,000 30%
> 660,000 to 960,000 > 55,000 to 80,000 > 660,000 to 960,000 > 55,000 to 80,000 35%
> 960,000 > 80,000 > 960,000 > 80,000 45%

Note: Annual Taxable Income = Total Income minus RMB60,000 and specific expenditures, and other deductible items

The tax brackets for business operation income have been expanded as well.

The Current IIT Law

Annual taxable income amount (RMB)

The New IIT Law

Annual taxable income amount (RMB)

Tax Rate
<= 15,000 <= 30,000 5%
> 15,000 to 30,000 > 30,000 to 90,000 10%
> 30,000 to 60,000 > 90,000 to 300,000 20%
> 60,000 to 100,000 > 300,000 to 500,000 30%
> 100,000 > 500,000 35%

 

  1. New framework for deductions

The new IIT Law provides an annual tax exemption allowance (deduction) of RMB60,000 per year (i.e. RMB 5,000 per month) for all taxpayers on their comprehensive income.

The existing special deductions include basic pension insurance, basic medical insurance, unemployment insurance and other social security premiums, as well as housing provident fund etc.

The new IIT Law introduces additional special deductible items, such as expenses towards children education, continuing education, major illness medical treatment, housing loan interest or housing rent, support for elderly etc.

The detailed scope, standards and implementation steps of which shall be determined by the State Council at a later stage.

  The Current IIT Law The New IIT Law
Standard deduction Standard basic deduction RMB 3,500 per month Standard basic deduction RMB 60,000 per year (RMB 5,000 per month)
Special deductions Basic pension insurance

Basic medical insurance

Unemployment insurance and other social security premiums

Housing fund

Basic pension insurance

Basic medical insurance

Unemployment insurance and other social security premiums

Housing fund

Additional special deductions Children education

Continuing education

Major illness medical treatment

Housing loan interest or housing rent

Support for elderly

In addition, where an individual donates his/her income to education, poverty alleviation and other public welfare and charitable undertakings, the portion of donation which does not exceed 30% of his/her declared taxable income amount may be deducted from his/her taxable income amount.

The taxable income amount for income from lease of property shall be the balance after deduction of RM800 from each income item which is not more than RMB4,000, or the balance after deduction of 20% of expenses from each income item which is more than RMB4,000.

The income amount of remuneration for personal services, author’s remuneration and royalties shall be the balance after deduction of 20% of expenses from the income. The income amount of author’s remuneration shall be reduced and computed at 70%.

  1. Adding the tax avoidance clause

Finally, the new IIT Law introduces anti avoidance clauses which empower the authorities to deem where an enterprise enters into transactions not within arm’s length, or transactions whose main purpose is to obtain tax benefits such as reduction, elimination, or deferral of tax payments. If the tax is assessed, surcharges might be collected by the authorities.

  The New IIT Law
Article 8 Under any of the following circumstances, the tax authorities shall have the right to make tax adjustment based on a reasonable method:

 

(1)    The business dealings between an individual and his/her related parties do not comply with the arm’s length principle, and the tax payable amount of the individual or his/her related parties is thereby reduced, when there is no proper reason;

 

(2)    An enterprise controlled by a resident individual, or an enterprise established in a country (region) with significantly lower tax burden and jointly controlled by a resident individual and a resident enterprise, does not distribute or reduces distribution of profits which is attributable to the resident individual, when there are no reasonable business needs; or

 

(3)    An individual carries out other arrangements without reasonable business purpose and obtains improper tax gains.

 

Where there is a need to levy additional tax after making tax adjustments pursuant to the provisions of the preceding paragraph, the tax authorities shall levy additional tax and collect interest thereon pursuant to the law.

Related reading: Facing the New Definition of China Tax Residence: Expatriates Should Stay Tuned to What’s Coming Next

 

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