China: Out Now! – Draft of Implementation Regulations of the New IIT-Law


published on October 29 / reading time approx. 4 minutes



On October 20, 2018, the China State Administration of Taxation (“SAT”) published the "Draft Implementation Regulations of the Individual Income Tax (short: IIT) Law" and the “Draft Interim Measures for Special Deductions of Individual Income Tax” (“Draft”), which will be submitted to the State Council for final review after the inquiry period is over in 15 days.



The Draft clarifies various issues regarding collection and management measures under the new IIT Law passed in August 2018, and is expected to enter into force as from January 1, 2019.

The key points are summarized as follows:



“Five-Year Rule” to remain in force

Similar to the previous official response of the SAT, the Draft has retained the “Five-Year Rule” in the old law, that is, for individuals who obtain incomes outside China, and who do not have a residence in China but live in China for more than 183 days and less than 5 years, among all their incomes derived outside China, the part paid inside China is subject to Chinese IIT (“Five-Year Rule”). Please refer to our previous article: “IIT China: Tax Preferential Treatment for Foreign Individuals Continues: Alert under the Good News”.


It is clarified in the Draft that a resident taxpayer who has lived continuously in China for less than 5 years or who has lived for 5 years but left Chinese territory for more than 30 days in a single departure may be exempt from taxation on his incomes that are derived and paid from outside China.


It is to note that compared with the current regulations, multiple departures for more than 90 days is no longer an option for circumventing the “Five-Year Rule”; whereas the time condition of a single departure for more than 30 days is adjusted from “within one calendar year” to “within 5 years”. Therefore, it is more flexible for foreigners to arrange 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 Five-Year Rule. Please refer to our China Newsflash August 2015.


Special additional deductions

In the new IIT-Law, the newly added special deduction items are planned to adopt a fixed deduction model. The main tax allowance are summarized as follows:


​Items of deduction ​Deductible amount
​School and Higher Education for Children​RMB 12,000 per year (RMB 1,000 per month) for each child
​Continuing education with degree​RMB 4,800 per year (RMB 400 per month)
​Advanced Vocational Training​RMB 3,600 per year(only deductible in the year of obtaining certificate)
​Medical treatment of critical illnesses

Deduction based on actual amount for expenses over RMB 1,5000 that are borne by the taxpayer. Upper limit is RMB 60,000 each year.

​Interest expense of housing loan for first-time buyers ​RMB 12,000 per year (RMB 1,000 per month)
​Rental expenseRMB 9,600~14,400 each year(varies in different cities)
​Caring for parents(older than 60 years)​RMB 24,000 per year (RMB 2,000 per month)


Tax exempted

The Draft also mentioned that foreign individuals can choose to adopt the special additional deduction policy, or continue to enjoy the current tax incentives on children's education fees, language training fees, and housing subsidies. This indirectly indicates that some existing tax-free subsidy policies are basically maintained after the implementation of the new law. Some other subsidies (such as: family reunion fees, dry cleaning fees, catering expenses, etc.) that are not mentioned in the Draft have not been explicitly abolished. If there is no follow-up provision, it is likely that these subsidies will continue to be effective. However, the details will have to be further confirmed with local tax authorities after implementation.


In addition, it is not stated in the Draft if the tax preferential policies such as annual bonus, severance payment, equity incentives, etc., can be continued or changed after the implementation of the new law. It is believed that the State Administration of Taxation will continue to issue relevant regulations to clarify the existing policies.


Witholding Agents

In the Draft, it is clearly stated that withholding agents are obliged to make tax declarations in accordance with the information provided by the taxpayer, but does not require them to verify the information before the declaration. Therefore, it can be expected for the payroll accounting department that although the workload will increase, the compliance risk will not.


Obligation to annual tax declaration

In addition, if a taxpayer needs to apply for tax refund or pay overdue taxes, he must complete annual filing. To apply for the tax refund, a bank account opened in the name of the taxpayer in China is required.

If a taxpayer obtains only salary income from a single employer, and the employer pay the full amount during prepayment, the taxpayer is no longer be obliged to complete annual tax declaration.

It is worth noting that the Draft does not account for how a foreigner who has lived in China for 183 days but has not opened a bank account in China (such as foreigners who temporarily stay in China under permanent establishment) should make annual filing.



In general, despite the far reaching intensity of the individual tax reform, the impact on foreigners is less than expected due to the fact that the current preferential policies are basically preserved.

The main impacts are summarized as follows:

  1. A departure of more than 30 days can still serve as a condition for breaking the “Five-Year Rule”;
  2. The judgment condition for resident taxpayers is shortened to 183 days;
  3. If the conditions for resident taxpayers are met, the annual filing shall be completed (except for the situations that are eligible for exemption from annual filing);
  4. Choice between special deduction items and current preferential policies is allowed;

For foreigners working in China, the remaining of the “Five-Year Rule” and the current tax preferential policies are undoubtedly good news. However, it is foreseeable that the new law will generate uncertainties in the initial stage of implementation and operation. 


Also, the above provisions are in the stage of discussion, the final version may still be further modified. Foreign employees are suggested to pay close attention to policy trends and law enforcement in various places to avoid non-compliance.

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