China tax alert: Individual Income Tax — special additional deductions

The Standing Committee of the National People’s Congress revised the Individual Income Tax Law of the People’s Republic of China (IIT). The revisions came partly into effect in October 2018 predominantly affecting tax rates and general standard deductions for general income (please see previous tax-related articles).

From 1 January 2019, the revised IIT law goes into full effect and the added special deductions for overall taxable income will play a significant role in IIT calculations.

Under the revised IIT law, special additional deductions refer to expenses which may be deducted from one’s general income in the following areas:

  • Children’s education
  • Continuing education
  • Medical expenses for serious diseases
  • Housing mortgage interest
  • House rent
  • Elderly care expenses

The Circular on Seeking Public Comments on Interim Measures for Additional Special Deductions for Individual Income (Draft for Comment) promulgated 20 October 2018 outlines the requirements and deductible amount of each additional special deductions item. The Interim Measures according to the Ministry of Finance and State Taxation Administration are established to effectively to reduce tax burdens and improve lives.

Table of special additional deductions

Item Deductible Amount Details Restrictions
Children’s education:
pre-school through doctoral level academic education
RMB 12,000 each child per year (RMB 1,000 per month) A deduction may be split 50/50 between the father and mother or be 100% from one parent. N/A
Continuing academic education RMB 4,800 per year (RMB 400 per month) A deduction may be claimed during the academic education. An individual cannot concurrently claim continuing academic education expenses and deductions for their children’s education.

If a deduction has been made by an individual’s parents as their children’s educational deduction, the individual is unable to apply this deduction again, as it may only be applied once.

For example, if Individual A claims their post-graduate studies as a continuing academic education deduction and simultaneously the parent of individual A claims the post-graduate studies as a children’s education deduction—this is forbidden.

Only one deduction may be claimed.
Continuing education of skilled personnel or specialised technical professional qualifications RMB 3,600 per year A deduction shall only be claimed when the relevant certificate is obtained. N/A
Medical treatment of serious diseases RMB 60,0000 per year (maximum claim) based on the real expenditure Medical expenses exceeding RMB 15,000 borne and paid by an individual could be deemed as surpassing the amount between RMB 15,000 up to RMB 75,000. Medical expenses are required to be noted within the social medical insurance management information system as medical expenses for serious diseases.

This deduction may only be applied during the annual IIT declaration time period and the original receipts or copies should be kept.
Housing mortgage interest RMB 12,000 per year (RMB 1,000 per month) Deductions may be claimed on the mortgage interest of the first house using the individual housing loan of a commercial bank or housing provident fund. The purchase of the first house can be either the taxpayer or spouse of the taxpayer. Deductions may only be claimed by one party; the contract of a housing loan, as well as the payment slips for paying back the loan, should be kept.
Housing rent RMB 14,400 per year (RMB 1,200 per month): houses located in a municipality directly under the Central Government, a provincial capital, a city specifically designated in State plan or any other city determined by State Council. RMB 12,000 per year (RMB 1,000 per month): houses located in cities with a registered population within municipal districts of more than 1 million.RMB 9,600 per year (RMB 800 per month): houses located in cities with a registered population within municipal districts of less than 1 million. Housing rental is required to be located in the city which the taxpayer or spouse of the taxpayer is employed or the city of the taxpayer or spouse of taxpayer’s habitual residence. Taxpayer and spouse of the taxpayer are forbidden from simultaneously claiming housing mortgage interest and housing rent deductions.
Elderly care RMB 24,000 per year (RMB 2,000 per month) where the taxpayer is an only child.

Where the taxpayer is not the only child, the deduction shall be equally apportioned among the taxpayer and siblings. However, the apportionment shall not exceed RMB 12,000 per year (RMB 1,000 per month).
Elders are required to be 60 years old and above.

Where the deduction is apportioned, the supporters are required to enter into a written agreement.
Where the taxpayer supports two or more elders, deductions may not be multiplied by the number of elderly people.

No matter how many elderly people a taxpayer supports, the number may not exceed two people.

Special additional deductions mainly apply to Chinese residents domiciled in China. Although, the Interim Measures stipulates foreign individuals to either claim additional special deductions, in accordance with the provisions or foreigners may continue to enjoy the existing tax exemptions.

In order to enjoy the additional special deductions, taxpayers are required to submit the relevant information the withholding agent (usually the employer) or relevant tax authority. Therefore, employers, as withholding agents, should be updated and implement the relevant procedures to additionally bring employees up to date, request such information, as well calculate the relevant special additional deductions and declare the withholding as according to the information provided by the employees.

Come 1 January 2019, HR departments should accommodate the updates according to law revisions outlined in this article.

If you would like more information about the Individual Income Tax or other related corporate matters, send us an email at talktous@horizons-advisory.com, and we’ll have a Horizons professional contact you.

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