On Friday, August 31st the Standing Committee of the National People’s Congress confirmed the amendments to the Individual Income Tax law, which will fully take effect on January 1st, 2019. This is the most significant tax reform in many years with strong effects on both Chinese and foreign income tax payers.
Definition of tax resident and taxation of worldwide income
With the reformed IIT law, China introduces the concept of tax resident, defined as any individual residing in China or spending more than 183 days in one tax year in China. For resident individuals, both home and abroad income is considered taxable income, a major change compared to the current situation, in which worldwide income only become taxable after more than 5 consecutive years in China. Further details have yet to be released by the State Council.
Standard deduction and comprehensive annual income
The monthly standard deduction will be increased from currently RMB 3.500 to RMB 5.000 effectively. Taxable income will be calculated on an annual basis, not monthly as before. Four income types taxed differently before will now be combined into one category as comprehensive income and will all be taxed at the same. This includes income from salary and wages, independent professional services, author’s remuneration and royalty income. Other categories of income remain unaffected.
The adjustment of tax brackets will mainly lead to a tax relief of individuals with low and medium income, since the range of the 3%, 10% and 20% tax brackets has been expanded, while the 25% bracket has been narrowed. The tax brackets for an applicable tax rate of 30, 35 and 45% remain the same as before.
The new law also allows for a number of new special deductions. These include children’s tuition expenses and adult education expenses, fees for medical insurance covering severe illnesses, elderly support expenses, interest paid on housing loans and housing rental expense. The limits for such deductions as well as the calculation methods remain unclear as of yet. Foreign taxpayers already enjoyed tax benefits through special deductions under the current law. If these special benefits will continue to exist or if they will be replaced by the deduction rules for all taxpayers has yet to be confirmed.
New tax filing procedure
Income tax for residents will be collected through advance payments (typically withheld by the payer) with monthly provisional filings and finalized by an annual reconciliation filing by the taxpayer. This tax return is due between March 1st and June 30th of the following year. For non-residents, taxable income will be calculated monthly or per transaction.
The legislation covers many other aspects of tax law, among them also anti tax avoidance rules similar to the GAAR applied to corporations. Chinese authorities will cooperate more closely and will increase information sharing among agencies. For Chinese tax payers who intend to leave China, tax liquidation is a must before residence (Hukou) cancellation.
The new law will become effective from January 1, 2019, with some rules such as the tax brackets already taking effect on October 1st, 2018.The offical notice was released here. As many details have yet to be clarified by further regulation to be published by the State Council and Tax Authorities, ECOVIS Beijing will continue to monitor and publish any new information about further regulation regarding the amended tax law 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: firstname.lastname@example.org
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