Are You Tax-liable Pursuant to the New China Individual Income Tax Law?
On August 31st, 2018, the decision to amend the Individual Income Tax Law of the People’s Republic of China (the “PRC IIT Law”) was issued. The newly amended PRC IIT Law will take full effect from 2019, in which the main changes concern the criteria for tax residency status, the categories of the taxable income, tax deductions, tax rates and data-sharing between public authorities. This article will focus on who are tax-liable and entitled to the preferential provisions.
Which expats shall be tax-liable in China?
In general, the criteria for tax residency status has been tightened according to the amendments. Please follow the flow chart below to assess whether you are tax-liable in China as a foreign national.
Figure 1. Are you tax-liable as a resident or a non-resident individual?
According to the Regulation on the Implementation of the Individual Income Tax Law of the People's Republic of China (the “2011 Implementation Regulation”), individuals who are domiciled in the territory of China mean those who have habitually resided in China because of household registration, family or economic involvements.
Furthermore, it is stipulated that days for temporary leave from Chinese territory shall be included in the calculation of the total days. “Temporary leave from Chinese territory” means one time leave of not more than 30 days or multiple leaves of which the total length does not exceed 90 days from the territory of China within a tax year.
However, the rules in the 2011 Implementation Regulation were formulated in accordance with the PRC IIT Law that was issued in 2011, where the criteria for tax residency status was a full-year-stay in China instead of the now applicable aggregated-half-year-stay. A new Implementation Regulation, without doubt, will be announced soon.
Preferential provisions for foreigners
The 2011 Implementation Regulation has a preferential provisions for taxation of foreigners. Specifically, individuals who have no residence in China but have stayed in China for over one year but not exceeding five years shall only pay IIT on the part of their income derived from the companies, enterprises, other economic organizations or individuals within the territory of China; individuals who have stayed in China for more than five years shall also pay individual income tax on all their income derived from outside China from the sixth year.
“In order to maintain the stability of policy, the next step in implementing the new personal income tax law will be to consider continuing the preferential arrangements for foreigners, including those from Hong Kong, Macao and Taiwan.”, the State Administration of Taxation declared.
The 2011 Implementation Regulation also states that, individuals not resided in China but who have stayed in China continuously or accumulatively not more than 90 days in a tax year shall be exempted from tax on the part of the income derived within the territory of China but paid by employers outside China and the payment not coming from the latter's institutions or places within the territory of China. It is uncertain whether this exemption will continue under the new law.
It is said these amendments imply the Chinese government’s attempts to keep in line with the international practice. Foreign employees and employers should keep up with the changes and also prepare for the possible upcoming tax benefits. In the upcoming article on the PRC IIT Law, we will provide more information on the taxable income and the tax deductions.