China Tax Alert: Revised Individual Income Tax promulgated

Summary

On 31 August 2018, the Standing Committee of the National People’s Congress promulgated the revised Individual Income Tax Law of the People’s Republic of China (IIT Law). A revision of the IIT Law, last revised in 2011, was highlighted by the Ministry of Finance during the third session of the Thirteenth National People’s Republic of China. Ten days later, the National People’s Congress released the Draft Amendments Seeking Consultation from the Public (Draft). The revised IIT Law retains the key amendments announced in the Draft and shall be effective from 1 January 2019.

Key changes

Tax residence           

An individual who is domiciled in China or a non-domiciled individual and resides in the PRC for 183 days or more (total accumulated days) is considered as a tax resident of China. Tax residents are subject to both incomes derived within and outside the territory of China.

Non-tax residents who reside in China for less than 183 days (total accumulated days), and not a domiciled in China, are subject to individual income tax on the income derived within China.

Annual tax calculations

General income defined as wages and salary income, labour remuneration, author’s remuneration and royalties shall be calculated on a consolidated basis by the tax year (1 January – 31 December) for tax residents. General income for non-tax residents will be calculated on an item-by-item basis by month or by time. The general standard deduction for general income is increased to RMB 60,000 per tax year or RMB 5,000 per month for a non-tax resident.

Tax rates effective 1 October 2018

General income

Level Annual Taxable Income (RMB) Tax Rate (%)
1 0 – 36,000 3
2 Above 36,000 and below 144,000 10
3 Above 144,000 and below 300,000 20
4 Above 300,000 and below 420,000 25
5 Above 420,000 and below 660,000 30
6 Above 660,000 and below 960,000 35
7 Above 960,000 45

Business income

Level Annual Taxable Income (RMB) Tax Rate (%)
1 0 – 30,000 5
2 Above 30,000 and below 90,000 10
3 Above 90,000 and below 300,000 20
4 Above 300,000 and below 500,000 30
5 Above 500,000 35

(Annual Taxable Income, as mentioned in Business Income, refers to the remainder after deducting the costs, expenses and losses from the gross annual income received in a single tax year.)

Deductible items

Special deductions are added in the revised IIT Law. Tax residents may deduct the following items from the general income:

  • Expenses for children’s education
  • Continuing education
  • Medical expenses for serious diseases
  • Interest on mortgages or house rentals
  • Elderly care expenses

Details involving specific quotas, standard and implementing steps will be determined by the State Council.

Anti-avoidance provisions

Extra provisions are provisioned to tax authorities to challenge tax avoidance. Under the following scenarios, tax authorities may adjust taxes:

  • Business transactions violating arm-length principles between an individual and their affiliated party, resulting in lower taxable income for the individual and affiliated party without justifiable causes.
  • An enterprise established in a low tax country by a Chinese tax resident or jointly controlled by a Chinese tax resident and Chinese tax resident enterprise and without reasonable business means does not disturb profits or a reduced profit distribution to the individual.
  • Other arrangements made by the individual without justifiable business purposes to seek unjustified tax avoidance.

Conclusion

The revised IIT Law paves the way for major changes for IIT. Although tax returns remain to be filed on a monthly basis, the change to annual taxable income, expanded tax rates and consolidated tax categories shall influence tax calculations. More specifically, foreigners in China should take note of the 183-day tax residency revision. Previously, only worldwide income was taxable after an aggregated 5-year residency in China, which now is amended to 183 days.

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