China’s State Administration of Taxation (SAT) has published a circular of Individual Income Tax (IIT) reform, which came into effect on Jan. 1, 2019. The reform brings significant updates to tax rates adaptation range, deductions, filing requirements, and information sharing among governmental departments. The reform has far-reaching effects for both Chinese nationals working abroad and foreign nationals (non-Chinese citizens) working in China.
Summary of changes
The IIT reform:
- Adjusts range applicable to tax brackets and tax rates.
- Increases the standard tax deduction.
- Introduces “specific additional deductions .”
- Requires IIT obligation settlement before immigration for Chinese nationals.
- Revises the criteria in determining China tax resident status.
Adjustments of tax brackets, tax rates, and standard tax deduction
The new IIT law combines the four existing categories of income (salary and wages, income from providing services, author’s remuneration, and royalties) into a new category of “comprehensive income,” and it retains a set of progressive tax rates ranging from 3 to 45 percent as stipulated by the original tax law. The brackets of lowest tax rates (i.e., 3 percent, 10 percent, and 20 percent) are broadened, the 25 percent tax bracket is narrowed, and the brackets of highest tax rates (i.e. 30 percent, 35 percent, and 45 percent) remain unchanged.
The standard deduction is increased from RMB 3500 per month to RMB 5000 per month (or RMB 60,000 per year), which is applicable to the comprehensive income. The new IIT law abolishes the additional standard deduction of RMB 1300 per month currently for foreign nationals working in China.
Changes to tax residence determination
The revised IIT law introduces the “183-day residence in China” threshold to determine taxpayer’s resident and nonresident status. This is much shorter than the “one-year threshold” in the previous tax law. This change to tighten the requirements for nontax residents has a significant impact on individuals — such as non-Chinese citizens working in China — as well as Chinese citizens with permanent residency in other countries but who still travel frequently to or stay in China.
Changes to tax-free benefits
“Specific additional deductions” introduced in the revised IIT law have some overlap with the original tax-free benefits claimed by non-Chinese citizens . According to the revised IIT law, non-Chinese citizens working in China can use “specific additional deductions” when they become China tax residents. Otherwise , they can only use original tax-free benefits. In addition, non-Chinese citizens can only claim either “specific additional deductions” or original tax-free benefits, but not both of them. Once selected, no changes are allowed during a tax year.
SAT provides a three-year transition period from Jan. 1, 2019 to Dec. 31, 2021, for adopting the new “specific additional deductions.” After the three-year transition period, overlapping items, namely housing subsidies, language training, and children’s education expenses, can only be claimed in accordance with “specific additional deductions.” One implication is that the current tax-free benefits applicable to non-Chinese citizens are based on the actual occurrence, while the dollar amount allowed under “specific additional deductions” is very limited. This may greatly increase the tax burden of non-Chinese citizens working in China.
Five-year to six-year rule
The revised IIT law replaces the five-year rule with a “six -year rule.” Under the new rule, a non-Chinese citizen will be exempt from Chinese IIT on foreign source income that’s not paid by a Chinese entity, unless the non-Chinese citizen has stayed in China for 183 days or more in each calendar year in the past six consecutive years. The change of this tax policy is very helpful in attracting and retaining non-Chinese citizens to work in China. It’s worth noting that non-Chinese citizens working in China need to comply with the filing requirements if they wish to use this rule to be exempt from IIT in China for their foreign source income.
Some of the changes will be more favorable to non-Chinese citizens than others, and a thorough review of individual tax liabilities is recommended when planning international assignments for your staff in China.
If you have questions about how the revised IIT law will affect your employees, please give us a call.