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05.07.2019

China’s new IIT law

The tax residency stipulations for non-domiciled individuals have been amended by the new individual income tax law

Key Facts
  • The tax residency should be firstly determined for a non-domiciled individual’s initial IIT filing in a calendar year.
  • For non-domiciled individuals who have stayed in China for more than six consecutive years, their worldwide income is taxable, if they have stayed in China for 183 days or more in a calendar year from the seventh year onward.
  • Non-domiciled individuals meeting the China tax residency criteria during 2019 and 2021 can opt for the existing tax exemption policies or the new deductions policies.
Author
Martin Ng
Managing Partner
China
> View Profile

A new individual income tax (“IIT”) law has come into effect on 1 January 2019. The tax residency stipulations for non-domiciled individuals have been amended by the new IIT law.

Tax residents vs. non-tax residents

In practice, tax residency should be firstly determined for a non-domiciled individual’s initial IIT filing in a calendar year, as the tax consequences for tax residents and non-tax residents are different under the new law (as compared page down):

 Items  China tax residents  Non-tax residents
 Definition  Individuals who stay in China for 183 days or more in a calendar year  Individuals who stay in e China for less than 183 days in a calendar year
 Taxable income (Note)  Both China and foreign sourced income  China sourced income only
 Comprehensive income  Employment income, personal service income, author remuneration, and royalties  Not applicable
 IIT calculation for a tax year  Annual basis  Monthly basis
 Monthly withholding method for employment income  Accumulative income base  Separate month income base
 Applicable income brackets for monthly withholding  Annual income brackets   Monthly income brackets 
 Allowable deduction  RMB 60,000 per year  RMB 5,000 per month

 

Note: The taxation provisions are summarised below: 

   Income derived from China  Income derived from overseas 
 Tax residency  Duration in China  Paid inside
 China
 Paid outside
 China
 Paid inside
 China
 Paid inside
 China
 Non-tax
 residents
 ~ 90 days  Taxable  Exempt  Non-taxable  Non-taxable
 Non-tax
residents
 90 days 
 ~ 183 days
 Taxabe  Taxable  Non-taxable  Non-taxable
 Tax residents  Less than
 6 years
 Taxabe  Taxable  Taxable  Exempt
 Tax residents  More than
 6 years
 Taxable  Taxable  Taxabel  Taxable

Six-year rule

For non-domiciled individuals who have stayed in China for more than six consecutive years, their worldwide income is taxable, if they have stayed in China for 183 days or more in a calendar year from the seventh year onward. The “six year” refers to stays in China for 183 days or more in each of six consecutive years, without any single trip outside China for more than 30 consecutive days in any calendar year within the six years.

The best approach to avoid being taxed on worldwide income is to travel outside China for more than 30 consecutive days in a calendar year. Then, the existing six-year period can be broken up and a new six-year period will start being counted in the following year. 

Non-taxable benefits for tax residents

Non-domiciled individuals meeting the China tax residency criteria during 2019 and 2021 can opt for the existing tax exemption policies (option a) or the new deductions policies (option b) as listed in the table below. 

 Tax exempted benefits (Option a)    New deductions (Option b)
 Housing rental (no limitation)    Housing rental (with limitation)
 Children education fee (no limitation)    Children education (with limitation)
 Language training fee (no limitation)    Continuing education (with limitation)
 Home leave    Housing loan interest
 Meal and laundry    Support for elderly
 Relocation allowance    Serious illness medical treatment
 Travel expenses     

 

As of 1 January 2022, some benefits in option (a) will cease to be effective. Only non-domiciled individuals regarded as China tax residents can enjoy option (b). Each deduction item under option (b) is capped, as opposed to unlimited deductions in option (a). Hence, foreign individuals’ IIT costs are expected to rise at this point. 

Article published in Global Mobility Newsletter#1/2019
Brief overview of recent or expected changes in the area of Global Mobility in 9 selected countries
View publication
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