China: New details for the implementation of the new IIT law


published on January 18, 2019 | reading time approx. 4 minutes




The new IIT law in the PRC has taken another hurdle in the implementation process. Most recently, several tax circulars have been promulgated:


  • Implementation Rules of PRC Individual Income Tax ("IIT") Law ("Implementation rules")
  • SAT Public Notice on Transitional Matters concerning Tax Collection
  • Administration for Full-scale Implementation of the new IIT Law (“Public Notice 56”)
  • Notice on Transitional Matters concerning Preferential Policies after the Amendment of IIT Law (“Circular 164”) and others


The new regulations are aiming to serve the full-scale implementation of the new IIT Law since 2019.


From Five-year rule to Six-year rule

Implementation rules has broadened the “Five-year rule” regarding world-wide income tax filing obligation in the old IIT Law, which has been modified as “Six-year rule”, that is, for an individual who has no domicile in China but has resided in China for not more than six consecutive years in each of which he resided for 183 days or more accumulatively, among all their incomes derived outside China, the part paid or borne inside China is subject to Chinese IIT.


It is also easy to understand and realize the condition which breaks the “Six-year rule”, that is, where an individual left China for more than 30 days on a single trip in any year during which he resided in China for 183 days or more accumulatively, the consecutive years in each of which he resided in China for 183 days or more accumulatively could be counted again from the beginning. Comparing to the previous draft regulation, in which the time condition of a single departure for more than 30 days was set as “within 5 years”, the current condition is less flexible. Foreigners may not circumvent the world-wide income tax filing obligation by arranging a cross-year departure. However, we still have to remind that it is not a safe tax planning to avoid global tax filing obligations by deliberately breaking the Six-Year Rule.


IIT declaration by tax withholding agent and special additional deductions

According to Public Notice 56, when making payment for wage and salary income to tax resident individuals, withholding agents are required to add up the year-to-date taxable income for wage and salary, calculate the year-to-date IIT payable with the applicable annual progressive tax rates, deduct the cumulative IIT paid up to the last month, to get the IIT payable of the current month.


Example – calculation of the Chinese IIT 

Employee A has a monthly gross salary of RMB 201.666,75. The monthly deductible amount RMB 5.000, the monthly tax exempt amount RMB 10.000. The monthly calculation for the IIT based on the annual progressive tax rate:




Accumulated taxable income: = 201.666,75 - 10.000 - 5.000 = 186.666,75;
IIT January = annual accumulated IIT = 186.666,75 * 20% - 16.920 (deduction at source) = 20.413,35



Accumulated taxable income: = 186.666,75 + 201.666,75 - 10.000 - 5.000 = 373.333,50; annual accumulated IIT = 373.333,50 * 25% - 31.920 = 61.413,38;
IIT February = annual accumulated IIT - paid IIT in January = 61.413,38 - 20.413,35 = 41.000,03



Accumulated taxable income: = 373.333,50 + 201.666,75 - 10.000 - 5.000 = 560.000,25; Accumulated IIT = 560.000,25 * 30% - 52.920 = 115.080,08;
IIT March = Accumulated IIT – accumulated paid IIT in January and February = 115.080,08 - 20.413,35 - 41.000,03 = 53.666,70


Furthermore, withholding agents should consider the additional special deductions for each taxpayer when withholding monthly IIT. It is assumed that the amount of information in need will expand, the data documentation will be more demanding, and the IIT calculation method will be much more complicated.


In the previous draft additional special deductions were made. Two facts had been finalized as follows:


* The upper limit in the previous draft regulation is RMB 60,000 per year.

** The deductible amount in the previous draft regulation is maximal RMB 14,400 per year.


As for the taxpayer, since the withholding IIT is calculated based on the annual progressive tax rates, the marginal tax rate for wages and salaries may increase by month from the beginning of calendar year, which may result in the increase of general effective tax rate,and the taxpayer's monthly net salaries may decrease by month accordingly.


Tax preferential policies transition

Circular 164 has given the green light to the IIT related preferential policies after the implementation of the New IIT Law. At the same time, a 3-year transition period is set out, i.e., from 1 January 2019 to 31 December 2021, during which period a stable continuation of the preferential policies will be basically guaranteed.


When a resident individual receives annual performance-related bonus during the transition period, the former preferential tax calculation method is still optional, or he/she may choose to tax it on a combined basis with the other comprehensive income of the year. After the transition period, the former calculation method will not be adoptable. It is noticed that Circular 164 has not mentioned the above treatment applies to non-resident individuals, which may imply that since 2019, the preferential tax calculation method for annual bonus will not be applicable to non-resident individuals any more.


Similarly, a foreign individual, who fulfills the requirements of tax residents, can choose to enjoy the ongoing tax-exempted allowances, i.e., housing allowance, Chinese language training fee, children's education fee, meal and laundry expense, home-trip expense and relocation fee, during the transition period. Alternatively, they can choose to enjoy the additional special deduction in fixed amounts and give up the tax-exemption treatments. After the transition period, only the special additional deduction is adoptable.


In addition, Circular 164 basically continues the tax preferential treatments for severance payments, share based incentives and other income with slight amendments, which also helps to guarantee a stable transition for the new IIT Law.



Generally speaking, a foreign individual who fulfills the requirements of tax residents, i.e., physically staying in China for more than 183 days cumulatively during a calendar year, will not be affected by the New IIT Law significantly. Whereas, foreign individuals who does not fulfill the requirements of tax residents may have higher tax burden due to the abolishment of certain relevant tax preferential policies. Therefore, tax planning and pre-arrangements are always meaningful to foreign individuals from both tax efficiency and compliance perspectives.


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