Since 1 January 2019 the new China individual income tax law (IIT law) has come into full effect. To clarify several questions to the public regarding its implementation and to provide an overview for some of the updates brought by the IIT law, in December of 2018, the State Administration of Taxation released multiple notices on their website.
The revised IIT law makes significant changes to China’s individual income tax regime covering areas such as special itemized deductions, expatriates’ tax-exempt benefits, and preferential tax treatment of annual bonus.
Special Itemized Deductions
Starting from 1 January, six types of expenses fall into the category of special itemized deductions:
The amount of special itemized deductions are based on certain conditions such as city categories, namely 1) municipalities directly under the central government, provincial capitals, planned municipalities and other cities determined by the State Council; 2) cities with a registered population of more than 1 million people; 3) cities with a registered population no more than 1 million.
Under the previous regulations, special non-taxable items were available to expatriates’ certain incomes, under which allowances of housing, food and business travel; and fees of children’s education, language training, family reunion, moving and laundry. These items will remain non-taxable during a transition period until 2021. During the transition period expatriates can choose either to enjoy the foregoing non-taxable items or to claim special itemized deduction for the same item (as listed above). Once chosen, it cannot be changed within one tax year. As of 1 January 2022, only special itemized deductions shall be applied to expatriates in China.
New Impacts on Expatriates
Besides the rules regarding choosing between non-taxable benefits and deductions as mentioned above, there are some other changes relating to expatriates in China.
To classify whether an individual is a resident taxpayer, the current rules for one-year residence in China changes to 183 days per year. It is also noteworthy that earlier, in October of 2018, the threshold for individual income tax has been increased to RMB 5,000 per month and applies to both local (previously RMB 3,500) and foreign employees (previously RMB 4,800) residing within China.
Article 4 of the Implementation Regulations of the IIT law (order No. 707) states that, if an individual has no domicile in China and has resided in China for 183 days or more (in a tax year) and for less than six consecutive years, the individual’s foreign-sourced income paid by an overseas organization or individual shall be exempted from individual income tax after filing with the tax authority in charge. In case the individual leaves China for more than 30 consecutive days in any year in which the individual resides in China for 183 days or more cumulatively, the calculation of consecutive number of years shall restart. In short, this new rule upgrades the term of “five-year tax rule” to six years.
Preferential Tax Treatment of Annual Bonus
The annual one-off lump sum bonus received by a taxpayer, as provided under the previous 2005 No. 9 notice, shall be divided by 12 and a beneficial tax rate will be applied to calculate the payable tax. The purpose of this means is to define the one-off bonus as an aggregate of all months’ income instead of one month total income, so as to reduce the applicable tax rate and ease the tax burden.
The preferential tax treatment as mentioned above can still be applied within the transition period of three years. Pursuant to the No. 164 Notice released on 27 December 2018, for the annual one-off bonus obtained by a resident individual, provided that it complies with previous regulations, the preferential tax treatment shall still be applied and the bonus will not be included in the annual comprehensive income to calculate tax by the end of 2021. As of 1 January 2022, the annual one-off bonus will be included and taxed as part of the annual comprehensive income.
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