China’s new Individual Income Tax law was passed at the end of August. It is a major overhaul of the tax system, as outlined here, and will bring major changes both to taxpayers and employers as the withholding agents, with potential savings for tax payers due to new tax brackets and newly introduced deductions.
Last Saturday (October 20th, 2018) the State Tax Authority of China published draft rules outlining the scope and planned ceiling amounts of these deductions.
Taxpayers can claim a deduction of up to RMB 12.000 per year and child for expenses related to the child’s education. This includes fees for pre-school, elementary, middle and high school as well as university fees (bachelor and master programs and PhD studies). Each parent can claim 50% of the deduction, or one parent applies for 100% of the deductions.
Costs for further education are tax-deductible up to a maximum amount of RMB 3600 to 4800, depending on the occupational qualification obtained.
Mortgage and rental expenses
Mortgage interest payments are tax-deductible for up to RMB 1.000 per month (RMB 12.000 per year). This deduction is only applicable to the first home. Under the current draft rules, one partner per married couple can make use of this deduction.
The maximum amount deductible for rent expenses depends on the location. It ranges from RMB 800 in small cities to RMB 1.000 in mid-size cities and RMB 1.200 in big cities.
Taxpayers can only claim a deduction for mortgage interest or rent, but not both at the same time.
As for medical care, taxpayers can claim as much as RMB 60.000 per year should their expenses (as recorded in the social insurance system) exceed RMB 15.000 after public health insurance coverage.
Support of the elderly
Supporting a parent aged 60 and older results in a deduction amount RMB 24.000 per year and per parent. This deduction amount has to be split among siblings jointly caring for a parent.
The proposed rules are subject to review after a two week period during which the public is invited to comment on this proposal.
Generally, some of these rules will also be applicable to foreign taxpayers residing in China, even though it does not go into much detail on this aspect. According to the draft, foreigners will have the possibility to choose if the regulation of the new IIT law or old regulation regarding tax exemptions specifically for foreigners will be applied. Not all tax deductions will be available to foreign tax payers though; the current proposal only mentions education and further education, mortgage and rental expense deductions in this context.
As these regulations have yet to be confirmed and we are waiting for more regulation on how the new IIT law will be applied, ECOVIS Beijing continues to follow the latest developments. We will publish more information as it becomes available.
Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: email@example.com
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