As mentioned in our previous issue of newsletter on 21 September 2018, a broad review of the IIT law, approved on 31 August 2018, that will become effective on 1 January 2019.
On 20 October 2018, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly published draft implementation regulations regarding the Individual Income Tax (IIT) Law and draft rules of specific additional tax deductions (together “the draft IIT Implementation Regulations”). On 22 December 2018, the IIT Implementation Regulations have been promulgated.
The Implementation Regulations provide that:
- Five-year rule will stay
- China domicile will continue to be assessed on same criterion
- Scope of China-sourced income redefined
- Change in scope of taxable income and IIT calculation method
- Documentation requirement for individual tax payers on itemized deductions
- Withholding agent’s duty of care
On 14 December 2018, CW organized the 3rd IIT Seminar in the Greater Bay Area, covering the Implementation Regulations also. There are two types of China tax resident: (1) by domicile and (2) by period of stay.
“If an expatriate habitually resides in China due to family relationship and economic interests, he/she can be regarded as having a domicile in China and therefore subject to worldwide taxation”, one of our speakers, Hailey Guo, explained.
Whilst an expatriate working in China needs to review and mitigate the risk of being assessed as China-domiciled, he or she needs to monitor his or her period of stay in China also. Starting from 2019, an individual who does not have a domicile in China but resides in China for 183 days or more would be regarded as a Tax Resident. A non-domiciled tax resident is not subject to worldwide tax immediately – there is concession.
In the Implementation Regulations, non-China domiciled individuals who have lived in China for a total of 183 days or more for less than five consecutive years, or for five consecutive years but have a single departure for more than 30 days, their global income is subject to IIT, except for income sourced from overseas and not borne by Chinese enterprises or individuals, which can be exempt from IIT, UPON filing with the tax authorities about the income sourced from overseas. Where the non-China domiciled individuals leave China for more than 30 days in any year in which they reside in China for 183 days or more cumulatively, the computation of consecutive number of years for which they reside in China for 183 days or more cumulatively shall restart.
As for companies, managers in the human resources, finance and administration function, we strongly advise to comprehend fully the impact of the amended law and the continuous update on the implementation policies. These include additional burden arising from tax filing and compliance risks under the amended IIT regime. Facing the new definition of Tax Residency, companies may find it hard to arrange tax break for foreign executives with heavy responsibilities in managing the daily operations in China. Enterprises should review their compensation and benefits strategy and policies and employment contracts, and communicate with employees the IIT reform’s impacts. As to employees, they should be pro-active in managing their domiciles and tax-breaks, and be aware of their responsibilities for the accuracy of information submitted for tax deduction claims.
CW will explain in more detail about the Implementation Regulations in the next Newsletter. For any enquiries, please write to email@example.com.
Related reading: China’s amended Individual Income Tax Law: A summary of the key changes (https://www.cwhkcpa.com/en/chinas-amended-individual-income-tax-law-a-summary-of-the-key-changes/)