In China, individual income tax (‘IIT’) is calculated on an accumulated basis.
From August 32 2018, the revised Individual Income Tax Law reformed taxable income for tax residents to be measured on a consolidated basis from the 1 January to 31 December (tax year).
In other words, the tax rate applied in January should be lower than December, as it is start of the tax year. Whilst, tax rates may raise in December as the accumulated income may increase through the year.
We summarise IIT basic calculations in the below.
How Individual Income Tax is Calculated
|Resides in the PRC for 183 days or more||Reside in China for less than 183 days||Reside in China for less than 90 days|
|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 from China.||Remuneration from foreign employers to individuals working in the PRC is exempt from tax if the individual resides in the PRC for less than 90 days in a calendar year, provided that the remuneration is not borne or paid by an establishment in the PRC.|
Individual Income Tax Rates for General Income
|wages and salaries|
|provision of labour services|
IIT is withheld on comprehensive income of tax residents is made on a consolidated basis and calculated utilising an annual accumulative income method. For non-tax residents, IIT is withheld on an item-by-item basis and by month or by time. The general standard deduction for general income is RMB 60,000 per tax year or RMB 5,000 per month for a non-tax resident.
Income from comprehensive income is taxed according to the following progressive rates, ranging from 3% to 45%:
|Annual Taxable Income (RMB)1||Tax Rate (%)|
|36,000 or less||3|
|The part >36,000 < 144,000||10|
|The part > 144,000 < 300,000||20|
|The part > 300,000 < 420,000||25|
|The part > 420,000 < 660,000||30|
|The part > 660,000 < 960,000||35|
|The part > 960,000||45|
1The “Annual Taxable Income” in the table refers to the amount after deducting the CNY60,000 standard general deduction, special deductions, special extra deductions and other deductions under the law from the annual general income received by a resident individual in a single tax year
|Special deductions||Special additional deductions||Other deductions|
|Special deductions refer to social contributions including basic pension insurance, basic medical insurance, unemployment insurance and other social security contributions such as housing provident funds.||Special additional deductions refer to expenses for children’s education, continuing education, medical treatment for major illness, home loan interest or house rentals, support for elderly and so forth.||Other deductions specified according to the law include the expenses incurred by an individual for the payment of enterprise annuities and occupational annuities in compliance with state regulations, and for the purchase of commercial health insurance and tax-deferred commercial pension insurance in compliance with state regulations, and other items that may be deducted as specified by the State Council.|
Until January 2024, foreigners in China may still deduct certain items from IIT or claim special additional deductions.
Deductible items for foreigners include:
- Employee housing costs (with supporting invoices) borne by an employer;
- Reasonable home leave fares of two trips per annum for the employee
(with supporting invoices);
- Reasonable employee relocation and moving costs (with supporting
- Reasonable reimbursement of certain meals, laundry, language
training costs and children’s education expenses in the PRC (with
Income Other Than Employment Income
- Private owned business sole proprietorship enterprises; business on a contract or lease basis
- Income earned by individuals from privately-owned businesses, sole proprietorship enterprises or from the operation of a business on a contract or lease basis is generally subject to IIT at progressive rates from 5% to 35%. The 35% marginal rate applies to annual taxable income (gross revenue less allowable costs, expenses and losses) over RMB500,000.
- Income from interest, dividend, transfer of property, royalty income, rental income and other income
Such income is normally taxed at a flat rate of 20%. However, IIT may be reduced or exempted for certain income meeting certain prescribed conditions.
Tax Filing and Payment
The IIT shall be withheld by the payer. Employers should withhold IIT from resident individuals’ employment income and pay to the tax authorities with a “cumulative withholding method” on a monthly basis.
If the annual cumulative tax amount withheld and the final tax payable amount are inconsistent, resident individuals should perform annual IIT reconciliation filing with the in-charge tax authorities from 1 March to 30 June in the following year. For tax years 2019 and 2020, resident individuals can be exempted from the annual IIT reconciliation filing if certain prescribed criteria are met.
For non-resident individuals’ employment income, employers should withhold IIT on a monthly basis. IIT returns must be filed within 15 days following the end of each month.
Annual IIT Self-reporting Requirement
Starting from 1 January 2019, individuals under six circumstances are required to perform annual IIT self-reporting with the PRC tax authorities, including: final settlement required for the comprehensive income, obtaining overseas income, cancellation of Chinese household registration due to immigration, non-resident individuals obtaining employment income from two or more places within the PRC, etc.