Amended China Individual Income Tax Law has far reaching impact

On 31 August 2018, the Standing Committee of the National People’s Congress passed the amendments to the Individual Income Tax Law (the “IIT Law”) during the 13th National People’s Congress of the People’s Republic of China. This is the seventh amendments since the enforcement of IIT Law in 1980. The last amendment was made in 2011.

When in force?
 
The amended IIT Law will become effective on 1 January 2019. However, as early as 1 October 2018, income from wages and salaries, income derived by entrepreneurs, business income as well as income from subcontracting and leasing will adopt the new tax tables and new basic monthly deduction.
 
Key changes
 
The table below summarises the major changes in the amended IIT Law.

  Existing rule New rule
Article 1
Tax resident
An individual with domicile in China or without domicile in China but stays in China for one year or more is considered a resident in China and shall pay IIT for income derived in and out of China.
 
An individual without domicile in China or with domicile in China but stays in China for less than a year is a non-resident.  Only income derived in China is subject to IIT for non-resident.
 
An individual with domicile in China or without domicile in China but stays in China for 183 days or more is considered a resident in China and shall pay IIT for income derived in and out of China.
 
An individual without domicile in China or with domicile in China but stays in China for less than 183 days within a tax year is a non-resident.  Only income derived in China is subject to IIT for non-resident.
 
A tax year refers to a calendar year.
Articles 2 and 3
Consolidation of income and introduction of “business income”
The following types of income would be taxed separately subject to different rates:
 
3% to 45%
  • wages and salaries
20% to 40%
  • income from personal services
5% to 35%
  • income from production and business operations by entrepreneur
  • income from subcontracting or leasing operation of entities or organisation
20%
  • income from authorship
  • royalties
  • interest and dividends
  • income from leasing of property
  • income from transfer of property
  • incidental income 
“Consolidated Income”: 3% to 45%
 
The following 4 types of income will be grouped under “consolidated income”
  • wages and salaries
  • income from personal service
  • income from authorship
  • royalties
“Business income”: 5% to 35%
  • The original “income from production and business operations by entrepreneur” and “income from subcontracting or leasing operations of entities or organisation” are replaced by “business income”
The following types of income remain unchanged at 20%
  • interest and dividends
  • income from leasing of property
  • income from transfer of property
  • incidental income
Article 6
Deductions
For wages salaries
  • Monthly basic deduction of RMB3,500
  • Statutory social security and housing fund contributions
 
 
For consolidated income
  • Monthly basic deduction increase to RMB5,000
  • Other than statutory social security and housing fund contributions, adds new specific deduction such as:  
  1. education fees for children
  2. continued education
  3. medical expenses for serious illness
  4. mortgage interest or rental expenses
  5. elderly care expenses  
Article 8
Anti-avoidance rule (new)
N/A Empower the China tax authorities to make tax adjustments in respect of the following situations:
  • Related party transactions are not on arm’s length basis leading to reduction of tax paid by an individual / a related party
  • A resident individual controls an entity in a low-tax jurisdiction by himself or together with a tax resident enterprise, and that entity does not distribute profits to the individual or reduces the profits to be distributed to the individual without proper business reason
  • An individual obtains inappropriate tax benefits due to arrangements without proper business reason
  
What are the tax rates?
 
The existing 7-bracket progressive tax rate scale from 3% to 45% remains the same but tax brackets at 3%, 10% and 20% have widened.
 
Table 1 - Consolidated income
Level  Existing (Note 1) New (Note 2) Tax rate (%) 
Monthly taxable income
 (RMB)
Annual taxable income
(RMB)
Monthly taxable income
 (RMB)
Annual taxable income
(RMB)
0 – 1,500 0 – 18,000 0 – 3,000 0 – 36,000
1,501 – 4,500 18,001 – 54,000 3,001 – 12,000 36,001 – 144,000 10 
4,501 – 9,000 54,001 –108,000 12,001 – 25,000 144,001 – 300,000 20 
9,001 – 35,000 108,001 – 420,000 25,001 – 35,000 300,001 – 420,000 25 
35,001 – 55,000 420,001 – 660,000 35,001 – 55,000 420,001 – 660,000 30 
55,001 – 80,000 660,001 – 960,000 55,001 – 80,000 660,001 – 960,000 35 
Above 80,000 Above 960,000 Above 80,000 Above 960,000 45 
 
Note 1: Tax rates apply on wages and salaries.

Note 2: Tax rates apply on consolidated income.
 
Table 2 - Business income
Level  Existing (Note 3) New (Note 4) Tax rate (%) 
Annual taxable income
(RMB)
Annual taxable income
(RMB)
0 – 15,000 0 – 30,000
15,001 – 30,000 30,001 – 90,000 10 
30,001 – 60,000 90,001 – 300,000 20 
60,001 – 100,000 300,001 – 500,000 30 
Above 100,000 Above 500,000 35


Note 3: Tax rates apply to income income from production and business operations by entrepreneur and income from subcontracting or leasing operation of entities or organisation.

Note 4: Tax rates apply on business income.
 
What are the implications?
 
The latest amended IIT Law has far reaching impact. The change that attracts the most discussion is undoubtedly the tightening on tax resident threshold from one year to 183 days.
 
For foreign individuals (including those from Hong Kong, Taiwan and Macau) currently working in China, the biggest concern is whether worldwide income would be subject to China IIT after spending 183 days in China within a year. As the threshold is so low, it is almost certain that anyone working full-time in China would be subject to IIT on their worldwide income according to the amended IIT Law.
 
Under the current Detailed Implementation Rules of the IIT Law, an individual without domicile in China would only attract IIT on worldwide income if he/she stays in China for five full consecutive years. Can they still rely on this five-year rule to protect them from worldwide income subject to IIT only after 5 years?  Would the 5-year rule be revised?
 
Once a foreign individual becomes a resident in China, would he/she trigger the obligation to update the tax resident status with a financial institution at home jurisdiction where he/she maintains a financial account leading to the automatic exchange of information between home jurisdiction and China?
 
With the introduction of the new anti-avoidance rule, it is written in the law the tax authorities can make tax adjustment on individuals involved in tax avoidance arrangements.
 
As the amended IIT Law would have huge impact on the IIT exposure of foreign individuals working in China and frequent travellers in China, we expect more details will be released soon.
 
All individuals and their employers and frequent travellers to China should review their situation and fully understand the IIT implications under the amended IIT Law due to the potential impact.