China: The New Individual Income Tax Law
China’s new Individual Income Tax Law (IIT) came into force as of 1 January 2019. This was passed in an effort to achieve a better income distribution, reduce the tax burden for taxpayers, as well as increasing the domestic consumption and to boost the economy. The People’s Republic of China (PRA) started the legislative process in June 2018, aiming to reform the Individual Income Tax Law. The first draft amendmant was published on 19 June 2018, with the process ongoing as issues are expected to arise. The new IIT Law, and the subsequent announcements, have already caused significant change to the life of both Chinese citizens and foreigners working in China.
Definition of tax residency
The new definition of tax residency is more in line with the international standards, defining a tax resident as an individual who either lives in China permanently, or is resident for an aggregate of 183 days or more during the single tax year. On the contrary, individuals who have resided in China for less than 183 days in aggregate during the tax year shall be deemed as non-resident.
Six year rule
Tax payers without a domicile in the territory of China that have not been tax resident in China for more than six consecutive years can continue to be exempted from the individual income tax on their foreign-sourced income, so long as itis not paid by a Chinese resident company or individual. If the individual leaves China for a continuous period of more than 30 days during the period of non-domicile in China, the six yearperiod will restart. However, the six year rule introduces a on-the-record filing requirement to claim tax exemption for the foreign-sourced income, and further clarifications are expected to be provided.
Tax threshold increased to 60,000 CNY
The threshold at which tax becomes payable has been raised to 5,000 CNY monthly (or 60,000 CNY yearly). Previously, Chinese citizens were entitled to a threshold of 3,500 CNY monthly, while foreigners were eligible to deduct 4,800 CNY from their monthly income.
Income consolidation and new tax brackets
Income from salaries and wages has been consolidated with the income from the provision of personal services, royalties and authors remuneration into the comprehensive income. Resident taxpayers will be taxed on an annual basis, and the progressive tax rates have been revised: tax brackets have been widened for lower tax rates.
Income from the production and business operation conducted by self-employed individuals will be considered as business income, taxed according to adjusted rates ranging from 5% to 35%. The taxable income will be the income generated during the year less the deductible expenses incurred during the operations.
Introduction of special additional deductions
Along with the revision of the tax brackets, special additional deductions have been introduced for resident taxpayers. Theseare related to expenses for children’s education, continuing education, treatment of serious diseases, housing loan interest, house loan, and elderly care. The resident taxpayers that are entitled to benefit of these deductions can enjoy a significant tax relief.
Eligible resident foreign individuals can benefit of the special additional deductions or continue to enjoy the previous allowances for housing, meal, and education. However, from 2022, foreigners will be allowed to enjoy only of the special additional deductions, if eligible.
To determine the preferential tax calculation for the year-end bonus, the taxpayer should dividethe amount of the bonus by 12, determining the applicable tax rates, without including the bonus amount into the comprehensive income. Alternatively, tax residents can also choose to include the bonus into the comprehensive income.
From 1 January 2022, taxpayers receiving the year-end bonus shall include the amount received into the comprehensive income of the year and calculate the personal income tax accordingly.
Withholding procedures and final settlement
Resident taxpayers earning a salary are subject to the individual income tax withholding, based on the cumulative withholding method, which calculates the amount of withholding tax according to the cumulative tax payable. The other income included in the comprehensive income will be subject to IIT withhold separately.
The resident taxpayers may handle a final settlement of the IIT between 1 March and 30 June following the tax year if the withholding tax on their comprehensive income has not been correctly applied at source, if they earned overseas income, if they apply for a refund, or if they earned taxable income in two or more different places.
Non-resident taxpayers will be subject to withholding tax according to the relevant withholding tax rates based on their monthly income.
In certain circumstances, tax authorities are empowered to make tax adjustments based on reasonable methods, especially if the transactions between the parties are not carried out under the arm’s length principle or if they provide improper tax benefits.
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