China: The Amendment to the Individual Income Tax Law is officially approved

published on September 11, 2018 / reading time approx. 2 minutes

   

On August 31, 2018, the Amendment to the Individual Income Tax Law ("Individual Income Tax - IIT") was officially approved. Some of the regulations will be implemented from October 1, 2018 and the whole amendments will be implemented from January 1, 2019.

 

 

New IIT system and standard deduction amount

According to the new IIT law, the IIT calculation mode will be changed to the "General Income Mode", in which the incomes derived from salary, labor services, author's remuneration and royalty will be taxed on a consolidated basis. The tax calculation will be changed from monthly basis to annual basis, but the IIT should be still pre-paid on monthly basis and subject to annual IIT filing from March 1 to June 30 in the following year. The new tax rate for this so-called "general income" is as follows:


 

Level Annual Taxable Income (RMB) Tax Rate (%)
​1​0 – 36.000​3
​2​36.000 – 144.00010​
​3​144.000 – 300.000​20
​4​300.000 – 420.000​25
​5​420.000 – 660.000​30
​6​660.000 – 960.000​35
​7​über 960.000​45

 

This calculation mode only applies to the Chinese resident taxpayers. For those who are classified as non-resident taxpayers, IIT is still calculated by month or by time. Their payable tax amount shall be calculated according to the monthly income converted from the annual income provided in the table above. The standard deduction amount will increase to RMB 5,000 per month.

  

The new tax rate and standard deduction amount will take effective from October 1, 2018.

  

Special extra deduction

Apart from special deductions which include social insurances, the Amendment also introduces "special extra deductions", which refer to expenses for children's education, continuing education, medical treatment for major diseases, interest on housing loans, house rents, support on elderly, etc. The detailed rules are still not published, but it is forecast that a lump-sum deduction could be applied due to feasibility.

   
Definition of resident taxpayer

According to the Amendment, any individual who has a domicile in China or who has no domicile but has stayed in China for 183 days or longer in a single tax year is considered as Chinese tax resident and shall pay IIT on any income derived from within and outside China.

 

According to the current IIT implementation rules, for individual who has no domicile in China but stay in China for between one and five years, IIT may be paid only on the income derived from enterprises inside China upon the approval of the competent tax authority. Any individual who has resided in China for more than five years shall, commencing from the sixth year, pay IIT on worldwide income.

 

The Amendment has tightened the criteria for determining the identity of resident taxpayers in a single tax year. Therefore, whether the "five-year rule" will still be valid and whether the super national treatment of foreign individual will be ended are still to be further clarified by the specific implementation regulations.

 

Furthermore, the new definition of tax residence will also have impact to Common Reporting Standard. If the individuals are recognized as Chinese tax residents, the finance institute shall transfer their information to Chinese authority.

 

Summary

Although the Amendment to the IIT Law is officially approved and published, the following hot topics still need to be further clarified:

 

  • Whether the preferential treatment on one-time annual bonus will still remain valid;
  • Whether foreign expatriates can still enjoy tax-exempted benefits on reimbursement basis;
  • Whether the current "five-year-rule" for foreign expatriates will be abolished;
  • The special extra deduction standard and scope.

 

 Contact

Steve Qin

Associate Partner

+8621 6163 5331

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Kai Kang

+8621 6163 5200

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