China reforms taxation on individual income
From our office IC&Partners Asia
From January 1st, 2019 a reform of the Individual Income Tax – IIT -has come into force in China; with two main aims:
- to reduce the tax burden for lower incomes;
- to limit the increase of the cost of living.
The main changes in this reform concern the criteria related to tax residence, the consolidation of certain categories of income, the modification of the rate brackets, the introduction of new deductible expenses, the implementation of measures to combat tax avoidance.
Under this new law, an individual who has spent in China 183 days or more in total in a calendar year will be considered tax-resident in China. However, foreign income gained by an individual tax-resident in China for more than 183 days in aggregate during a year and consecutively for a period of not exceeding 6 years (before this reform, 5 years) is exempt from IIT if such income is neither sourced in China nor paid by a Chinese enterprise or individual; the count of these 6 years restarts from zero if a tax-resident person leaves China for more than 30 days consecutively in a year (before this reform, more than 30 days consecutively or 90 days in aggregate during a year).
The obligation of tax-resident to pay the IIT will be calculated on an annual basis rather than monthly (as it was the case previously), but the employers are still obliged to retain the IIT on behalf of their employees on a monthly basis. The tax payer is obliged to present his annual tax declaration between 1 March and 30 June of the following year.
The reform also consolidate together different categories of income: in particular, wages and salaries will be consolidated with the income derived from the provision of independent personal services, the author’s remuneration and royalties: these incomes are going to form the “comprehensive income” to which a progressive taxation will be applied from 3% to 45%.
Furthermore, the tax rate brackets have been revised as shown in the following table:
|Previous IIT Law (applicable to wage/salary income only)||Amended IIT Law (applicable to the comprehensive income)|
|Taxable income (monthly) (RMB)||Taxable income (monthly) (RMB)||Tax rate (%)|
|≤ 1,500||≤ 3,000||3|
|˂ 1,500 ≤ 4,500||˂ 3,000 ≤ 12,000||10|
|˂ 4,500 ≤ 9,000||˂ 12,000 ≤ 25,000||20|
|˂ 9,000 ≤ 35,000||˂ 25,000 ≤ 35,000||25|
|˂ 35,000 ≤ 55,000||˂ 35,000 ≤ 55,000||30|
|˂ 55,000 ≤ 80,000||˂ 55,000 ≤ 80,000||35|
|˂ 80,000||˂ 80,000||45|
According to the new law, the standard deduction on taxable income is RMB 60,000 per annum for the tax-resident and equal to RMB 5,000 per month for the not tax-resident. In addition, new categories of deductible expenses have been introduced, which now include the following items: expenses for the education of the children, costs for training, health costs for serious illnesses, interest for real estate loans and rental costs of the home.
According to the new regulation in force since January 1st, 2019, tax-resident foreigners may (until December 31st, 2021) choose between to benefit from the new categories of deductible expenses or to continue benefiting from the tax exemption policies currently provided for foreign employees (in relation to accommodation costs, language training and children’s education expenses). From January 1st, 2022, tax-resident foreigners will only be able to benefit (as all Chinese citizens) from the new categories of deductible expenses introduced by the recently enacted reform.
The annual bonus paid in a lump sum to employee tax-resident in China will continue to benefit from a beneficial tax treatment by being taxed as a separate income (the amount of the annual bonus is divided by 12 for the purpose of determining the applicable rate); however, this beneficial tax treatment will end on 31st December 2021.
The law recently approved also includes tax avoidance measures that allow Chinese tax authorities to impose corrections and collect unpaid taxes with default interest when an individual obtains tax advantages through transactions that do not have a commercial justification or do not respect market prices or by controlling companies in tax havens.
IC&Partners Asia with its office in China is at disposal for any information, details and consulting support.