The Individual Income Tax of the People's Republic of China ("IIT") was revised in 2018 paved significant changes IIT calculations. With the 2020 Individual Income Settlement due by 30 June 2021, we update previous Horizon Q&A on IIT and provide an insight to income tax and compliance requirements pertaining to China's Individual Income Tax (IIT) Law. Let's jump in and answer some basic questions in three parts.
Q: Who is considered as a tax resident?
A: Under the IIT, a tax resident is defined by
either the domicile of the individual or the duration of stay in
China.
Domicile
Domicile refers to an individual who is usually or habitually
residing in China because of household registration, family or
economic involvements is deemed as a tax resident.
Practical note: a Chinese passport holder is deemed as a Chinese tax residency.
More than 183 days in one tax
year
An individual who has no domicile but has stayed in China for an
aggregate of 183 days or more within a single tax year is deemed as
a tax resident. Income of a Chinese tax resident derived both
inside and outside of China is subject to IIT. Although, income
derived from outside China and paid by overseas entity or
individual is exempted from IIT until the sixth consecutive
year.
Chinese tax residents with no domicile can be exempted from IIT on
the world-wide income, where the individual exit China for more
than 30 days on a single trip before the sixth consecutive
year.
Practical note: a foreign employee working in and out of China and stays in China for 200 days in a tax year for a Chinese established entity is deemed as a Chinese tax residency. Any salary income received from the Chinese established entity which is derived both in and out of China is subject to IIT.
Less than 183 days in one tax
year
An individual who has no domicile but has stayed in China for less
than an aggregate of 183 days within a single tax year is deemed as
a non-tax resident. However, it is important to note, the income
derived from the China of a non-resident is subject to IIT.
Practical note: a foreign employee dispatched to work in China for a Chinese subsidiary for 173 days in one tax year is deemed as a non-Chinese tax resident. The salary income received and derived from China is subject to IIT.
Less than 90 days in one tax
year
An individual who has no domicile but has stayed in China for less
than an aggregate of 90 days within a single tax year is deemed as
a non-tax resident. The potion of income derived from China paid by
an overseas employer and not borne by any institution or
establishment of such overseas employer located in China is
exempted from IIT.
Practical note: a foreign employee dispatched to work in China for 88 days in one tax year is deemed as a non-Chinese tax resident. Since the salary income was paid by an overseas employer and not the subsidiary in China, the income was not subject to IIT.
Q: What is defined as income derived from
China?
A: Under IIT, following definitions of income and
derived from China is deemed as income derived from China and
subject to IIT:
- Income from wages and salaries;
- Income from remuneration for personal services;
- Income from author's remuneration;
- Income from royalties;
- Income from business operation;
- Income from interest, dividends and bonuses;
- Income from lease of property;
- Income from transfer of property; and
- Incidental income
Practical note: income derived from China is subject to IIT regardless of where the payment is made. Therefore, if the income salary derived from China is paid aboard for a foreign employee residing in China for an aggregate 183 or more, such income is deemed income derived from China and subject to IIT.
Q: How is the tax year calculated?
A: The tax year of China is the same as the
calendar year, i.e. 1 January to 31 December, and "residing in
China for one year" is defined as residing in China for 365
days in a tax year.
The duration of stay in China includes the days for public
holidays, individual holidays and training days the individual
enjoyed within or outside of China when working in China.
It is also worth mentioning that the day on which the individual
enters or leaves China is considered a full day in determining
their duration of stay in China.
Q: How is IIT Calculated?
A: The following income are referred as
consolidated income and computed as a consolidated manner based on
the tax year for Chinese tax residents. For non-tax residents, the
consolidated income should be computed monthly or based on each
income item.
- Income from wages and salaries;
- Income from remuneration for personal services;
- Income from author's remuneration;
- Income from royalties;
Tax rates for consolidated income as follows:
Level | Annual Taxable Income (RMB) | Tax Rate (%) |
1 | 0 – 36,000 | 3 |
2 | Above 36,000 and below 144,000 | 10 |
3 | Above 144,000 and below 300,000 | 20 |
4 | Above 300,000 and below 420,000 | 25 |
5 | Above 420,000 and below 660,000 | 30 |
6 | Above 660,000 and below 960,000 | 35 |
7 | Above 960,000 | 45 |
For more details on the revised IIT calculations and deductions please see the articles: Revised IIT and IIT Deductions.
Q: When is the final annual settlement and payment of
tax due?
A: For consolidated income received by tax
residents, IIT shall be annually settled and paid between 1 March
and 30 June of the following year. Annual IIT settlement primary
applies to tax residents with income derived from two or more
sources. Tax residents may apply for a tax refund if the prepaid
tax during the tax year is higher than payable tax. Alternatively,
tax resident may be required to supplement the payable tax where
the amount is lower than the prepaid tax.
Q: How to file annual IIT settlement?
A: Filing is encouraged via the IIT APP.
Whilst, settlement can be proceeded at the local tax authority,
from our experience, the local authorities generally promote the
digital platform. For foreign tax residents, there are several
issues which could be encountered.
For instance, where the foreign tax resident's name or passport number is inconsistent, the foreign tax resident may have multiple tax declaration records. The overall consolidated income cannot be generated as each tax declaration record regarded a separate tax resident.
Practical example:
Mr, John Doe receives income from salary and royalties from two separate entities. For his salary income, his name is recorded as Doe John, whilst the royalty's income is recorded as John Doe, as a result, he has two separate tax declaration records, although John Doe is one tax resident. Mr. John Doe is required to contact the local tax authority to combine the two records into one.
Equally, the practical example may occur where an individual receives a new passport but does not update the passport number with the local authorities. Therefore, it is important to ensure all information is updated with the local tax authority.
Conclusion
IIT is a common area overlooked by foreign tax residents in China. In today's digitalised world, financial information of individuals is not only shared within the jurisdiction of the tax resident, but also worldwide via the framework of the Automatic Exchange of Financial Information between participating jurisdictions. Individuals residing as tax resident in China should strictly comply with the latest IIT rules and regulations. Especially, individuals with worldwide assets, as authorities through digitialisation have greater data access and tax supervision is more stringent. Those in violation of the IIT may face strict penalties including difficulties leaving China.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.