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China Adopts a Revised Individual Income Tax Law

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Category: Tax and Regulations
individual income tax China

Big changes ahead for Chinese Individual Income Tax regime.

On August 31st, China’s top legislature approved the revised Individual Income Tax (IIT) Law in their attempts to work towards a fairer income distribution. Upcoming changes allow for some growth in incomes, but also redefines the meaning of a resident individual in China, thus directly affecting foreigners working in China.

Introducing a Higher Minimum Threshold

As the SCMP reports, the final approved bill increases the monthly tax-free threshold to 5000 yuan (60 000 yuan per year), as compared to the previous 3500 yuan per month. The new tax threshold will apply to both local Chinese employees and foreigners working in China. The upcoming changes thus take into account the increase in consumer spending and aim to lessen the overall tax burden on taxpayers, especially of for the low to middle income group of consumers, allowing for some growth in average incomes before taxes kick in.

Table 1: Individual Income Tax Brackets

Taxable income is total income in a tax year minus the personal deduction of 60 000 yuan, specific deductions, itemized deductions for specific expenditures, and other deductible items.

Introducing Special Expense Deductions

The NPC Observer reports that in addition to “special deductions” (专项扣除) for social insurance contributions, the new bill for the first time introduces special expense deductions (专项附加扣除) for resident individuals. These include, but are not limited to, parental elderly care, children’s education, continuing education, treatment for serious diseases, housing rental and housing loan interest – however, more details on these are yet to be released.

New Tax Residence Rules

The revised law recognizes two types of tax-payers, namely resident individuals and non-resident individuals. The length of residence used to distinguish between the two groups will now be adjusted to 183 days from the previous one full year and the tax year runs from 1st of January until the 31st of December.

  • Resident individuals (居民个人) – referring to those who have domicile or reside in China for a total of 183 days in a tax year while receiving income either from PRC or abroad. Resident individuals must pay income tax in accordance with the law.
  • Non-resident individuals (非居民个人) – applies to individuals who do not have domicile and reside in China for less than a total of 183 days in a tax year.

In addition, for resident individuals, IIT on comprehensive income would be calculated annually (as opposed to monthly under the current Law) based on the total comprehensive income earned during a tax year, minus any applicable deductions. If the comprehensive income has tax withholding agent, the tax could be withheld by monthly or by number of times under the agent. And the tax resident should do the annual tax filing after year-closing.

Preventing Tax Evasion

The new law also adds an anti-tax avoidance clause, thus permitting tax authorities to adjust tax rates when individuals transfer property in violation of independent trading. Individuals evading taxes via overseas tax havens or obtaining improper tax benefits by organizing unlawful commercial activities will also be subject to the clause.

Table 2: The New Individual Income Tax Scheme at a Glance

The New Threshold to be Enforced in October

The New IIT Law will be implemented in two phases. Phase 1, including the higher tax threshold of 60 000 yuan per year and broadened access to lower tax brackets will take effect from October 1 of this year.
Details of the tax deductions, such as those for education and elderly care expenses, must still go through revisions and be decided by the State Council, based on the advice of the Ministry of Finance and the State Administration of Taxation. Thus, the effective date of Phase 2 will be January 1, 2019.
The current law has undergone seven revisions since it was enacted in 1980. The current threshold is 3500 yuan according to the revision made in 2011.

How to Calculate Your Taxes?

Not quite sure how the new tax threshold will affect your salary? Here’s a guide, followed by a simple example calculation to help you navigate through the tax system in China as of October 1st, 2018.

  1. Firstly, take your monthly gross salary, i.e. what you make before taxes, and subtract 5000 yuan from it. If applicable, also subtract any special deductions (i.e. for education, medical expenses, etc.) So the formula would be like this: Monthly gross income-special deduction-5000 ¥ =Taxable income
  2. As the Chinese taxes are progressive, use the above chart to find your tax rate and the applicable “quick deduction”. The tax rates range from 3% to until up to 45%.
  3. Next, the tax rate needs to be multiplied by your monthly taxable income. Subtract the “quick deduction” from your result and you will get the amount of tax you will have to pay from your salary in China.

An Example for Calculating the Monthly Income Tax:

So, for someone gross salary is 18 000 RMB per month, and special deduction is 3 600 RMB (assumed) the steps would be as follows:

  • Subtracting 3 600 RMB and 5 000 RMB from the gross salary:

18 000 ¥ – 3600 ¥ – 5000 ¥ = 9 400 ¥

  • Based on the chart, the tax rate for 9 400 RMB is 10% and the quick deduction is 210 RMB.
  • Tax computation will be :

9 400 ¥ * 10% – 210 ¥ = 730 ¥

From the above steps, we see that someone earning 18 000 RMB gross per month would pay 730 RMB for tax and end up bringing home 17 270 RMB.

Do you have more questions about the new IIT Law and how it may affect You? Contact us to learn more about the upcoming changes and follow us on social media to receive all the latest updates!

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  • Simon

    Thanks for this useful free info, guys. 🙂

  • Trevor

    Is 5000 for both locals and Foreigners? how about special deductions? are they also applicable for foreigners

    • Kristina Knut

      Hi Trevor!
      Yes, indeed, the new tax threshold of 5000 RMB will apply to both local Chinese employees and foreigners working in China and will be effective as of October 1st, 2018!
      As for the special deductions – expatriates have long been allowed to deduct certain expenses from IIT; under the revised law, all individuals (incl. expatriates) will be able to lower their monthly/yearly IIT payment by offsetting their income against “special additional deductions”. It is also important to recognize that foreigners will be subject to the same rules as local employees. In effect this can mean a decrease of the deductibles and so an increase of the tax burden, e.g. with relation to laundry, meal allowances, and home flight tickets, which are items that currently are deductible for foreigners but may not be in the future. However, please note that the full details about special deductions have yet to be released, as these will be effective only as of January 1st, 2019.
      Hope this answers you questions!

  • Steffi

    Hi, with this tax change, does the 5 year tax break rule still applies to foreigners? thanks

    • Kristina Knut

      Hi Steffi!

      Good question – as of now, it is unclear what will happen to the current “5-year tax rule” under which a foreigner’s global income is only taxed if the individual has stayed in China for an uninterrupted 5-year period. This is something to be rolled out in Phase 2 of the new IIT law (Jan. 1st, 2019), thus concrete administrative rules will be released by State Administration of Taxation in the coming weeks.

      But no worries, we will keep our eye out on any updates regarding the new IIT Law in China and will cover it on our blog – you can sign up for our newsletter to make sure you’re getting the latest updates 🙂

    • Jatin

      What’s the use of 5 years rule? you are required to pay tax on ur global income from 1st year here.

      • Kristina Knut

        Hi Jatin!
        Yes, the five-year rule states that foreign nationals, who have lived in China for at least one full year, are subject to individual income tax on their worldwide income.
        However, if you have lived for no more than 5 consecutive years in China, individuals may only be taxed on the portion of his/her worldwide income effectively paid in China.
        Exceeding the ‘Five Year Tax Rule’ can substantially increase an expats tax burden and therefore if the period of the ‘Five Year Tax Rule’ is not interrupted, subsequently an expatriate could incur IIT tax liability with the Local Tax Bureau (“LTB”) on worldwide income from the sixth year onwards for every consecutive year forthwith. IIT would therefore apply to all PRC and Non – PRC sourced income specified by law.
        As mentioned, it is still unclear whether the five year rule will remain once the new IIT Law will come into effect as of Jan. 1st, 2019.

  • Tommy T.

    Thank you so much for providing this analysis. It’s good to get the word out quickly. I believe there are quite a few retired expats who might need to file tax returns for next year.

    Currently, do foreigners in China need to report retirement benefits (i.e. foreign social security payments dposited to a foreign bank acct.) if they are tax residents (5 consecutive years) of China? Also, does China tax government paid retirement income of its citizens?

    Thanks again for an excellent article.

    • Kristina Knut

      Hi Tommy!

      For China tax resident, Currently the IIT law did not clearly state whether the pension abroad should be taxed in China.
      We’re hoping the upcoming release of the detailed IIT regulation will have a more detailed explanation on that.
      For non-China tax resident , we would need to judge the situation according to the tax treaty signed with China – in most cases, for non-China tax residents, the pension would not need to be taxed in China.
      As for your last question – there is no additional tax relief for pensioners, meaning Chinese retirees are not taxed.

  • Marc

    This information is pure gold. So many news around the web about this reform WITHOUT the numbers (specially the quick reduction amounts) and many other important details.

    Thank you very much.

  • Juristique

    Thank you for the information
    The dead-line is tomorrow for PIT declaration.

  • Dave

    I’m struggling to find any information, anywhere, on how to get a tax file number in China. The Government website has largely empty pages on it (!) and not a single Chinese friend knows how one would go about this. Any guidance please?

    • Kristina Knut

      Hi Dave!
      I assume you are asking about the Individual Tax ID number? For Chinese, the tax ID number is the same as their personal ID number. As for foreigners – if you’ve already paid taxes (e.g. on your income), the tax system will generate one for you automatically. You can ask the HR of your company to provide you tax payment proof – the receipt will have the tax ID number on it.
      If a foreigner has not paid any taxes in China previously, it’s possible to head over to the local tax bureau and apply for a local tax ID number.
      Hope this helps!

  • An

    Hello, Kristina. Thank you for useful information. I have a question. If Chinese government signed a Double taxation agreement with my country, and let’s say i pay taxes in my country, but stay in China most of the time, does this new Chinese IIT law still apply to me?

    • Kristina Knut

      Hi An!
      This question is a little vague – from the scenario you described, your only source of income is from your own country, correct?
      If you qualify as a tax resident in China (“stay in China most of the time” – meaning more than 183 days in a tax year?), first go through the latest conditions as stated in the IIT law of China. Then, go through the tax treaty between China and your country to see, which conditions apply and/or what has been modified to your country specifically. Often, the treaty will protect you from double-taxation, but various custom regulations may apply as well.
      In short – the IIT law most likely applies, but you may have to resort to the relevant tax treaty to determine your tax resident status and obligations.