On August 31, 2018, China passed the Draft Amendment to the Individual Income Tax Law (IIT Law), which is the most significant revamp in the past 38 years. The amendments will have a significant impact on foreigners living in China. The following is an overview of the key changes that may affect individuals in the global mobility arena.
Expatriates are now subject to “183-day rule” of tax residency
The new IIT law introduced more stringent criterion of “resident” determination. Under the new IIT Law, foreign individuals who have resided in China for 183 days or more within a calendar year, are considered as Chinese tax residents and are subject to IIT on their worldwide income. The current IIT Law uses one-year threshold in determining the residency status. However, the “five-year rule” under the old IIT law has been maintained to some extent.
Article 4 of the Draft Implementation Rules provide that income sourced out of China, which was not paid by Chinese enterprise or individual, is exempt from China tax liabilities if the foreigner has been a Chinese tax resident for no more than five consecutive years or, during the five-year period, he or she is absent from China for more than 30 consecutive days in one trip. The taxpayer is required to register with local tax authorities in order to enjoy the tax exemption treatment on the income sourced out of China (not paid by Chinese individual or entities). Approval from local tax authorities is no longer required, however, the taxpayers is required to register with local tax authority for compliance purpose.
New consolidated categories of taxable income
Per Article 2 of the new IIT Law, wage and salary, remuneration for independent personal services, author’s remuneration and royalty are consolidated into one category as comprehensive income. Some of them were traditionally taxed at a flat rate of 20% are now taxed at the 3-45% progressive tax rates according to the tax brackets. Under the new tax law, 20% of remuneration for personal services and royalty, and 44% of author’s remuneration can be exempt in calculating taxable income.
Increase the standard basic deduction
Effective October 1, 2018, the standard deduction on comprehensive income was increased to RMB 5,000 (US$720) per month for both resident and non-resident taxpayers. It used to be RMB 3,500 (US$504) for resident taxpayers and RMB 4,800 (US $691) for non-resident taxpayers.
Introduce new category of “special additional deductions”
Under a revised Article 6, resident taxpayers will now be able to deduct the following additional items from their comprehensive income:
- Caring for the elderly
- Children education
- Continued education
- Medical expenses for serious illness
- Housing loan interest or housing rent
Draft Rules of Additional Deductions provide the details regarding the above special additional deductions. For a foreign individual that qualifies for “special additional deductions,” the annual standard deduction on children education per child and housing rent is RMB 12,000 (US$1,727) and RMB 14,400 (US$2,072), respectively. Instead of taking standard deductions, they might choose to continue the current tax-exempt benefits on children education, language training and housing rent since there is no specific dollar limit on tax-exempt benefits.
The effective date of the new IIT Law is January 1, 2019. For the last quarter of 2018, income from salaries and wages can be deducted by the monthly exemption amount of RMB 5,000 along with other specific deductions.
While this is by no means all of the provisions of the new IIT Law, it does provide an overview of what are some of the most widely impactful elements of the new tax reform. If you have questions about these or other elements of the IIT Law will impact you, contact Clayton & McKervey.
- Note: The calculation is based on 1 USD = RMB 6.94832 for illustration purposes, which represents the daily average of the Bid and Ask rates on November 26, 2018 OANDA receives from many data sources.