China: Seventh Amendment on Individual Income Tax Law
On 31 August 2018, the seventh amendment on Individual Income Tax Law of China (the “Seventh Amendment”) is officially approved and announced. The last amendment on PRC Individual Income Tax Law was made in 2011 (referred as “Old IIT Law (2011)”). The major topics in the Amendment are summarized as follows.
1. Tax Resident Individual
In the Seventh Amendment, the term for being tax resident in China is changed from staying one year to 183 days or longer within a tax year in China (see details in below chart).
|Category||Old IIT Law (2011)||New IIT Law (2018)|
|Tax Resident||Any individual who has a domicile Note1 within the territory of China or;||Any individual who has a domicile Note1 within the territory of China or;|
|Who has no domicile but has stayed in the territory of China for one year or longer.||Who has no domicile but has stayed in the territory of China for 183 days or longer cumulatively within a tax year.|
|Non-tax Resident||Any individual who has no domicile and does not stay within the territory of China or;||Any individual who has no domicile and does not stay within the territory of China or;|
|Who has no domicile but has stayed within the territory of China for less than one year.||Who has no domicile but has stayed within the territory of China for less than 183 days cumulatively within a tax year.|
Note1: The “individuals domiciled in within the territory of China” mentioned above means individuals who by reason of their permanent registered address, family or economic interests, habitually reside in China.
Tax residents are subject to Chinese IIT on income derived from China and overseas (worldwide income). Non-tax residents are subject to Chinese IIT only on income derived from China. However, as the Chinese IIT regime not only has the IIT law but also a series of administrative regulations that provide more specific guidance on the taxation, the actual impact on the expats due to the amendment of IIT law might be different for each individual.
2. Applicable Individual Income Tax Rate
Under new IIT Law, four types of incomes, including salaries and wages, remuneration for personal services, authors’ remuneration and royalties), are combined as one new tax category called “comprehensive income” (referred as “Comprehensive Income”), which is subject to progressive tax rates ranging from 3% to 45%, with seven tax brackets.
In old IIT Law (2011), these four types of income are subject to different tax rate and brackets. For easy understanding, we summarized the old and new regulations in below charts.
|Old IIT Law (2011)||New IIT Law (2018)|
|Category||Tax Rate||Category||Tax Rate|
|Wages and Salaries||3% – 45% (7 brackets progressive tax rates)||Comprehensive Income||▶ 3% – 45% (7 brackets progressive tax rates)
▶ Expanding the tax brackets of lower tax rates (i.e. 3%, 10% and 20%),
▶ Reduce and unchanged tax brackets of higher tax rates (i.e. 25%, 30%, 35%, and 45%)
|Remuneration for personal services||20 % – 40% (3 brackets of progressive tax rates)|
|Grade||Old IIT Law (2011)||New IIT Law (2018)|
|Annual (monthly) taxable income (RMB)||IIT Rate||Annual (monthly) taxable income (RMB)||IIT Rate|
|1||No more than 18,000 (1,500)||3%||No more than 36,000 (3,000)||3%|
|2||18,000 – 54,000
(1,500 – 4,500)
|10%||36,000 – 144,000
|3||54,000 – 108,000
|20%||144,000 – 300,000
(12,000 – 25,000)
|4||108,000 – 420,000
(9,000 – 35,000)
|25%||300,000 – 420,000
(25,000 – 35,000)
|5||420,000 – 660,000
(35,000 – 55,000)
|30%||420,000 – 660,000
(35,000 – 55,000)
|6||660,000 – 960,000
(55,000 – 80,000)
|35%||660,000 – 960,000
(55,000 – 80,000)
|7||More than 960,000 (80,000)||45%||More than 960,000 (80,000)||45%|
3. Basic Deductions and Special Additional Deductions
Under new IIT Law, the basic deduction for Comprehensive Income is RMB 5,000 per month (old regulation for Chinese individual: RMB 3,500 for salaries; old regulation for foreigner: RMB 4,800 for salaries). The additional basic deduction (RMB 1,300) for foreigner is abolished.
Furthermore, the Seventh Amendment introduces the principle of special additional deduction. According to the Seventh Amendment, the special additional deductions include the expenditures on children education, continuing education, critical medical treatment, housing loan interest, housing rent and support for the elderly etc. However, the detailed scope, conditions and implementation steps are to be determined and announced by PRC State Council.
4. Schedule of Implementation
According to the Seventh Amendment, the new IIT Law will be enforced in two steps:
Step 1 – The new IIT tax rates and new standard basic deduction (RMB 5,000) will be implemented with effect from 1 October 2018;
Step 2 – The seventh amendment shall be fully implemented with effect from 1 January 2019.
Although the Seventh Amendment has been officially announced, certain topics still need to be clarified. For example, whether the current “five-year-rule” for foreign expatriates will be abolished; whether foreign expatriates can still enjoy tax-exempted benefits on reimbursement basis; the detailed scope and conditions for special additional deduction are to be determined.