New IIT Law Implementation Regulations also affecting the five-year rule
It comes as no surprise that laws and regulations in China change fast, being the cause of confusion for many. The big revisions in the Individual Income Tax (IIT) regulation China had recently announced affect both local employees and foreigners working in China. While many IIT aspects had been amended, a change in the residency status had also been initiated. This has led to concerns on whether the five-year tax rule, beneficial for many expat workers, would be kept.
On October 20, 2018, the China State Administration of Taxation (SAT) released the „Draft Implementation Regulations of the Individual Income Tax Law” and the „Draft Interim Measures for Special Deductions of Individual Income Tax “, which have now been submitted to the State Council.
The good news – yes, the five-year tax rule will indeed still be valid. However, the regulation will be affected due to the reforms. Keep reading to know what to expect in 2019!
Take a look at our previous post on the new IIT law: China Adopts a Revised Individual Income Tax Law
The five-year rule as of 2018
As the SAT has officially communicated, the „Five-Year rule” of the old law has been retained.
Currently, under the existing law, foreign workers staying in China less than a full tax year only pay taxes on their China-source income. At the same time, individuals residing in China for a complete tax year pay taxes on their worldwide income. This held true if the individual lived in China for 365 days in a tax year. A single temporary absence from China, which did not exceed 30 days or multiple absences not exceeding a total of 90 days within a tax year were not deducted from the total days spent in China.
Until now, expats employed in China could avoid being subject to the Chinese Individual Income Tax on their worldwide income. The expat would simply need to leave the country for more than 90 days (in case of cumulative multiple absences) or for more than 30 days (in case of a single absence) within the five years.
The five-year rule as of 2019
The main change stems from the redefining of who is considered a „tax resident “:
- 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.
The SAT had clarified in the Draft, that a resident taxpayer who has lived continuously in China for less than 5 years or who has lived in China for 5 years but has left the country for more than 30 days in a single departure may be exempt from taxation on his income that are derived and paid from outside of China.
Note – this means multiple departures for more than 90 days will no longer do to bypass the Five-year rule. The Five-year rule now works with a single departure of the expat worker for more than 30 days within the said 5 years.
The new regulations also state, that validation of PRC tax exemption on foreign sourced income shall be required under the „put-on-record” filing system.