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New Individual Income Tax Rules of the People’s Republic of China (“PRC”)



CMS, China

New Individual Income Tax Rules of the People’s Republic of China (“PRC”)

Dear Sir or Madam,

Please find below our update on the latest developments of Individual Income Tax Law in China.

Kind regards,
CMS, China

China has implemented a reform of the Individual Income Tax (“IIT”) aiming at reducing the tax burden of individual taxpayers. On 1st January 2019, the new PRC IIT Law associated with its detailed implementation rules as well as a series of supplementary IIT regulations (collectively referred to as the “New IIT Rules”) came into effect. The following is a summary of the key aspects brought by the New IIT Rules.

1. Definition of “PRC tax resident” and “non-PRC tax resident”

The concept of PRC tax resident and non-PRC tax resident, which was vague under the old IIT rules, is made clear under the New IIT Rules.  Time thresholds of constituting a PRC tax resident and for declaring IIT for the worldwide incomes are changed under the New IIT Rules as follows:
   
  PRC tax resident” refers to an individual who has domicile in China, or who does not have domicile in China but stays in China for no less than 183 days within a tax year.
     
  “Non-PRC tax resident” refers to an individual who does not have domicile in China and never resides in China, or who does not have domicile in China and stays in China for less than 183 days within a tax year.
     
 

Although there is no explicit definition of “PRC tax resident” under the old IIT rules, the old rules effectively treat the individuals without domiciles in China as PRC tax residents when they stay in China for one calendar year or above.  This “one-year” threshold is changed to “183 days” under the New IIT Rules.

Generally, a PRC tax resident is subject to PRC IIT for his / her global incomes whilst a non-PRC tax resident is subject to PRC IIT for his / her PRC-sourced income only.  However, the PRC IIT rules always offer more friendly tax exemption treatments for individuals who do not have domicile in China but regularly dwell in China.  The New IIT Rules also provide the following friendly treatments:

     
  If the number of consecutive years during which an individual who does not have domicile in China stays in China for no less than 183 days does not exceed 6, his / her non-PRC-sourced incomes that are paid by overseas organizations or individuals can be exempt from PRC IIT.  In terms of the number of consecutive years of PRC tax residency, the New IIT Rules are more favourable to the relevant taxpayers than the old IIT rules under which a “5-year” threshold was offered.

If the individual is out of China for 30 consecutive days in any tax year during which he / she stays in China for no less than 183 days, calculation for aforesaid “6 consecutive years” shall be interrupted and start over again.
     
  If an individual who does not have domicile in China stays in China for less than 90 days within a tax year, his / her PRC-sourced incomes that are paid by overseas employers and not borne by any institution or establishment set up in China by the overseas employers can be exempted from PRC IIT.
     
2. Taxable incomes and taxation methods
     
  a) Comprehensive incomes

A new tax item of “comprehensive income” is introduced under the New IIT Rules. “Comprehensive income” includes salaries and wages, service incomes, author’s remunerations, and royalty incomes, all of which used to be taxed separately under the old IIT rules. For PRC tax residents, comprehensive income shall be subject to tax pre-payments during a year plus an annual filing after the tax year ends. For non-PRC tax residents, comprehensive income shall be taxed on a monthly basis or each time when the income is received, with no annual filing required. Calculation method for PRC tax residents and non-PRC tax residents also differs slightly. Please refer to below tables for details.
     
    (1) Taxation methods
       
     
For PRC tax residents
     
Tax item Tax pre-payment Annual filing
Taxable Income Tax rate Time to withhold Taxable Income Tax rate Deadline
Salaries and Wages
Accumulated salaries minus accumulated standard deduction of RMB 5,000 per month, accumulated special deductible items (“SDIs”), accumulated special extra deductible items (“SEDIs”), and accumulated other deductible items
3% ~ 45% progressive rates applicable to annual comprehensive incomes
On monthly basis

Annual salaries

minus

annual standard deduction of RMB 60,000, annual SDIs, annual SEDIs and other annual deductible items

plus

80% of non-salary incomes

An extra 30% discount shall apply to author’s remuneration.

3% ~ 45% progressive rates applicable to annual comprehensive incomes
From 1st March to 30th June of the following year (annual filing conditionally required – see details in Section 2-a)-(2) below)
Service incomes

Income minus RMB 800 (if the income does not reach RMB 4,000); or
80% of the income (if the income is not lower than RMB 4,000)

An extra 30% discount shall apply to author’s remuneration
20% ~ 40% progressive rates

Each time income is received or on a monthly basis 

Author’s remunerations
20% flat rate
Royalty incomes
20% flat rate

      Notes:
       

   

Standard deduction has been increased from RMB 3,500 (applicable to Chinese citizens) and RMB 4,800 (applicable to expatriates) per month under the old IIT rules to the unified RMB 5,000 per month.  
     

Special deductible items (“SDIs”), which were also deductible under the old IIT rules, refer to statutory social insurance premiums and housing funds paid by the individuals.
     

Special extra deductible items (“SEDIs”), which are new deductible items created under the New IIT Rules, include costs related to children’s education, continuing education, housing loans, housing rent, medical expenditures and support of elderly. Please refer to Section 2-a)-(3) for details.
         
     
For non-PRC tax residents
     
   
Tax item Tax pre-payment Annual filing
Taxable Income Tax rate Time to withhold
Salaries and Wages Monthly salary minus monthly standard deduction of RMB 5,000 3% ~ 45% progressive rates applicable to monthly comprehensive incomes Each time income is received or
on a monthly basis 
Not required
Service incomes

80% of the income

An extra 30% discount shall apply to author’s remuneration.
Author’s remunerations
Royalty incomes


  (2) Situations where annual filing for comprehensive income is required

Under any of the following situations, annual filing for comprehensive income is required:
   
  • The taxpayer receives comprehensive incomes from two or more payers and his / her annual comprehensive income minus amounts of SDIs exceeds RMB 60,000;

  • The taxpayer receives any one or several such types of incomes as service incomes, author’s remunerations and royalty incomes and his / her comprehensive income minus amounts of SDIs exceeds RMB 60,000;

  • The taxpayer’s total IIT prepayment amount in a tax year is lower than his / her annual IIT payable amount; or
  • The taxpayer applies for IIT refund.



  (3) Special extra deductible items (“SEDIs”)

SEDIs include the following items:

   
(a)


Children’s education costs

If a taxpayer has children who receive pre-school education (from 3 years old to primary school entry) or full-time degree education (from primary school entry to doctoral education), the taxpayer is allowed to deduct RMB 1,000 per month per child from his / her comprehensive incomes for IIT purposes. For overseas education, the taxpayer is required to keep record of relevant supportive documents.

The RMB 1,000 can be deducted totally by either the husband or the wife, or RMB 500 by each of them. Once determined, the deduction method cannot be changed within one tax year.

Statutory guardians of minor children can enjoy the same deduction policy as parents.

     
(b)

Costs for participating in continuing educational programs

If a taxpayer himself / herself participates in any continuing degree education program, he / she is allowed to deduct RMB 400 per month during the program term from the month in which the program starts to the month in which the program ends.  The total number of qualified months is capped at 48. Qualified continuing degree education programs do not include overseas educational programs. If a taxpayer participates in any continuing education program for bachelor’s degree or below, the taxpayer may alternatively choose to have the RMB 400 deducted from his / her parent’s taxable income.

If a taxpayer participates in educational programs in relation to professional qualifications, he / she is allowed to deduct RMB 3,600 from his / her annual comprehensive income of the year in which the qualification certificate is obtained.
     
(c)

Medical treatment costs

If a taxpayer incurs medical treatment costs and the costs minus the compensation from the insurances exceed RMB 15,000 within one tax year, the taxpayer is allowed to deduct the amount actually incurred from his / her annual comprehensive income for IIT purposes upon IIT annual filing.  The deductible uncompensated medical treatment cost is capped at RMB 80,000. Such medical treatment cost may be deducted from either the taxpayer’s or his / her spouse’s comprehensive income. Medical treatment cost of minor children can be deducted by one of his / her parents. Medical treatment cost incurred by the IIT taxpayer himself / herself, his / her spouse and his / her minor children should be calculated separately.
     
(d)

Housing loan interest

A taxpayer is allowed to deduct RMB 1,000 per month from his / her comprehensive income for housing loan interest incurred for the first resident house within China bought by him / her or his / her spouse through commercial housing loans or housing fund loans. The deductible period is from the first month in which the housing loan interest incurred to the last month in which the loan agreement is terminated, with an upper limit of 240 months.

The RMB 1,000 can be deducted by either the husband or the wife, or RMB 500 by each of them. Once determined, the deduction method cannot be changed within one tax year.
     
(e)


Housing rents

A taxpayer can deduct certain housing rental from his / her comprehensive income, if he / she and his / her spouse do not own a resident house in the city where he / she works. The deductible amount varies between RMB 1,500, RMB 1,100 or RMB 800 per month, depending on the level and the population of the city where he / she dwells.

The deduction of housing loan interest and of housing rents cannot be enjoyed at the same time.

     
(f)

Costs for support of elderly dependent(s)

A taxpayer can deduct RMB 2,000 per month from his / her comprehensive income for IIT purposes, if he / she has to support elderly dependent(s) of 60 years of age or above. If the taxpayer is the only child of the elderly dependent(s), he / she can fully deduct RMB 2,000 each month. If the taxpayer has brothers and sisters, he / she and his / her brothers and sisters may share the deduction of RMB 2,000, each deducting no more than RMB 1,000 per month. The deductible amount does not increase if the taxpayer has to support more than one elderly dependents.

   


“Elderly dependents” refer to parents or grandparents whose children have passed away. The term “parents” shall include natural parents, step parents and foster parents. The term “children” shall include legitimate children, non-legitimate children, step sons / step daughters, foster children, etc.

Items (a) (b) (d) (e) and (f) can be deducted either on a monthly basis or on a one-off basis at the annual filing. Item (c) can only be deducted at the annual filing.

Please note that during the period from 1 January 2019 to 31 December 2021, there is a transitional IIT policy in relation to SEDIs for foreign individuals who qualify as PRC tax residents under the New IIT Rules. Please refer to Section 3-e)-(6) for details.


  b) Interest and dividend incomes, property leasing incomes, asset transfer incomes, occasional incomes and business incomes

The IIT implications generally remain the same for interest and dividend incomes, property leasing incomes, asset transfer incomes, occasional incomes and business incomes (derived from running business or proprietorship) under both the old IIT rules and the New IIT Rules.

The New IIT Rules make it clear that an annual standard deduction of RMB 60,000, SDIs and SEDIs can also be deducted from the annual business income for IIT purposes, in the event that the individual deriving business incomes does not receive comprehensive incomes (from which all the above deductions should have been deducted if the comprehensive incomes had been received by the individual).
     
3. Other main differences between the old IIT rules and the New IIT Rules

  a) Tax clearance for PRC citizens emigrating abroad
     
    Under the New IIT Rules, a PRC citizen is required to clear all historical IIT before he / she emigrates abroad. To be specific, the following procedures should be completed before emigration:
     
   
Annual filing for comprehensive incomes and business incomes for the year in which the individual intends to emigrate, as well as annual filing for comprehensive incomes and business incomes of the previous year, if not yet done;
   
Tax declaration for interest and dividend incomes, property leasing incomes, asset transfer incomes and occasional incomes of the year in which the individual intends to emigrate;
   
Make up all underpaid taxes and settle all outstanding taxes, if any;
   
Declare all SEDIs and other deductible items, if any.

The information of taxable incomes can be obtained from the individuals’ withholding agents and even if the relevant information is provided on a self-declaration basis, it is expected that the information will be easier to obtain than before due to the improved system for information exchange among various authorities.
     
  b) Self-declaration requirements for non-PRC tax residents
     
    Under the New IIT Rules, in most situations non-PRC tax residents are not required to perform annual filings as long as their IIT is fully withheld by the withholding agents on a monthly basis or each time when the incomes are received. Nevertheless, under the following situations IIT self-declarations are still required for non-PRC tax residents:
     
   
the non-PRC tax resident receives business incomes;
   
the non-PRC resident receives interest and dividend incomes, property leasing incomes, asset transfer incomes or occasional incomes, while the withholding agent fails to withhold relevant IIT;
   
the non-PRC tax resident receives salary incomes from two or more payers; or
   
the non-PRC tax resident receives incomes without withholding agents.
     
    If a non-PRC tax resident receives salary incomes from two or more payers, he / she is obliged to declare IIT with the tax authorities in charge of either payer by the 15th day of the following month.
     
  c) General anti-avoidance clauses

General anti-avoidance clauses, according to which the tax authorities are empowered to conduct tax adjustments under the following situations, are introduced in the New IIT Rules:
     
   
an individual conducts related party transactions that are not in line with the arm’s length principle, leading to reduction of taxable incomes of the individual or the related parties without proper reasons;
   
an entity, which is owned by PRC resident individuals or jointly owned by PRC tax resident individuals and PRC tax resident enterprises, is established in a country / region with significantly low tax rates and does not distribute dividends or reduces dividend distribution without reasonable operational needs; or
   
other arrangements without commercial reasons aiming at acquiring tax benefits illegally.
   
  d) Unique tax identification code

Under the New IIT Rules, each individual shall have a unique tax identification code for dealing with all tax issues. For an individual holding a PRC citizen ID card, the ID card number shall be his / her unique tax identification code. For an individual without a PRC citizen ID card, the tax authorities shall generate a unique tax identification code for him / her.
     
  e) Preferential IIT policies

Some of the preferential IIT policies (i.e., item (1), (2) and (6) below in this section) granted under the old IIT rules will be phased out at the end of 2021.  Details are as follows:

     

  (1) Preferential IIT policy for annual bonus

During the period from 1 January 2019 to 31 December 2021, a PRC tax resident may choose to have his / her annual bonus included in his / her annual comprehensive income for IIT purposes or have the annual bonus taxed separately based on a preferential taxation method which is largely inherited from the old IIT rules. Under the preferential taxation method, IIT progressive rates applicable to monthly comprehensive incomes under the New IIT Rules shall apply.

Starting from 1 January 2022, annual bonus should be included in one’s comprehensive income for IIT purpose.  In other words, the preferential treatment of separate taxation of annual bonus will be stopped from that time.
   
(2)

Preferential IIT policy for stock incentives

During the period from 1 January 2019 to 31 December 2021, certain types of stock incentive incomes obtained by a PRC tax resident shall not be combined with his / her other comprehensive incomes for IIT purposes, but shall be taxed separately based on the progressive IIT rates applicable to annual comprehensive incomes. PRC tax residents receiving stock incentives twice or more times within one tax year should combine these incomes for IIT taxation purposes.

The IIT policy for stock incentive incomes after 1 January 2022 is still pending for further notice.
   
(3)

IIT policy for commission incomes of insurance sellers and security brokers

Commission incomes earned by insurance sellers and security brokers shall fall under the tax item of “service incomes” and be included in one’s comprehensive incomes for IIT taxation purposes. The taxable commission income shall be determined based on the following formula:

Taxable income = commission incomes (VAT excluded) * (1 – 20%) * (1 – 25%) – surcharge taxes
   
(4)

IIT policy for receiving enterprise annuities / occupational annuities

Enterprise annuities / occupational annuities (“annuities”) received by individuals after statutory retiring age shall not be combined with other comprehensive incomes for IIT purposes, but shall be fully taxed separately. If the annuities are received on a monthly basis, the IIT shall be calculated based on the progressive tax rates applicable to monthly comprehensive incomes.  If the annuities are received on a quarterly basis, the quarterly annuities should be split into monthly annuities and be taxed based on the progressive tax rates applicable to monthly comprehensive incomes.  If the annuities are received on an annual basis, the annuities shall be taxed based on the progressive tax rates applicable to annual comprehensive incomes. Under the situation where the individual receives the annuities on a one-off basis before emigrating abroad or where the individual dies and his / her beneficiary receives the annuities on a one-off basis, the progressive tax rates applicable to annual comprehensive incomes shall apply for IIT taxation purpose.
   
(5)

IIT policy for severance payments, one-off allowances in relation to early retirement, internal retirement, etc.

Under the New IIT Rules, severance payments, one-off allowances in relation to early retirement, internal retirement (collectively referred to as “one-off allowances”) shall not be combined with other comprehensive incomes, but shall be taxed separately. The tax calculation rationale under the old IIT rules for one-off allowances are largely inherited.
   
(6)

Preferential IIT policy for foreign individuals who are PRC tax residents

During the period from 1 January 2019 to 31 December 2021, a foreign individual qualified as a PRC tax resident under the New IIT Rules may choose either to deduct the SEDIs or to continue to deduct such IIT-exempted items as housing allowance, language training allowance and children’s education allowance prescribed by the old IIT rules. Generally, deducting these IIT-exempted items under the old IIT rules is more favourable to the expatriates because there is no upper limit on the deductible amount of the IIT-exempted items, as opposed to the SEDIs offered by the new IIT rules.

Starting from 1 January 2022, the IIT-exempted items will cease to be available and a foreign individual qualified as a PRC tax resident can only choose to deduct the SEDIs from the comprehensive incomes for IIT purposes from that time.

In addition, the IIT exemption for meal allowances, relocation allowances, laundry allowances and qualified home trip allowances offered to the expatriates by the old IIT rules continues to be valid.


Should you have any query, please do not hesitate to contact the author:

Gilbert Shen
Counsel
Head of Tax Practice Area Group
CMS, China
T
+86 21 6289 6363

F
+86 21 6289 0731
E
gilbert.shen@cmslegal.cn
 

 


This information is provided for general information purposes only and does not constitute legal or professional advice. Copyright by CMS, China.

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