IIT Law before Sept 1, 2011

IIT Law amendment on Sept 1, 2011 

IIT Law amended on Sept 1, 2018 (effective on 1st Jan 2019)

A. Impact on disposable income (after-tax income)

B. Definition of tax residents

C. the 183-day rules

D. the 5-year tax exemption period 

E. How to determine the domicile and habitual abode of an individual 

F. Tax brackets, tax rates and quick deductions

G. Computation of IIT payable 

H. Comparing month-by-month with cumulative computation methods [read]

IIT Law - Implementation Regulations, (effective on 1st Jan 2019) - promulgated by the State Council

Administrative Rules - issued by the Ministry of Finance, State Administration of Taxation

The 183-day rule [Read]

Taxation on stock option [Read]

 

 


IIT Law Before 1ST SEPT 2011

 


 

PRC Tax Issues on Employment Income

Foreign nationals, including Hong Kong, Macau and Taiwan residents, who work in the PRC less than 365 days in the year are classified as non-residents under the PRC individual income tax law (the IIT). The source rules of employment income for non-residents are as follows:
 

  1. Foreign nationals, employed by foreign company to exercise employment in the PRC, shall pay IIT subject to the condition for tax exemption being met; Otherwise the employee shall pay tax in proportion to number of days he/she works in the tax year, irrespective of where the employee receives the income.
  2. Foreign nationals who enters into employment contract with an FIE should pay IIT irrespective of how long he/she works in the tax year.
  3. Foreign nationals who are not employed by resident entities but are deemed to have received income from an entity set up in the PRC shall be liable to PRC IIT.

Table 1 - Tax Liability for PRC and Non-PRC Tax Residents

Period of Stay

Tax status

PRC-Source

Non PRC-Source

 

 

Paid in PRC

Paid outside

Paid inside

Paid outside

<90 days (or 183 days)

Non-resident

v

exempt

x

x

=>90 days (or 183 days) but
<365 days

Non-resident

v

v

x

x

1~5 years

Resident

v

v

v

exempt

Over 5 years

Resident

v

v

v

v

Note : the 5-year exemption period has been extended to 6 years, effective from 1st Jan 2019.

 

183-day exemption rule

If the employee stays in the PRC for a period not exceeding 183 days in a calendar year, the employee will not be liable to income tax subject to the following conditions being satisfied: (a) the salary is not borne by any entity inside the PRC; and (b) the salary is not paid or borne by any entity situated inside the PRC.

Scope for Application of 183-day Exemption Rule

The 183-day rule shall not apply in the following situations: (i) the taxation on salaries of the directors in the FIE and the salaries of the employees in senior position, and (ii) the salaries paid by or charged to the entities situated in the PRC.

 

Example I (183-day Rule)

 

Determination of Tax Obligation

Question: A Japanese national holding a position as technical manager with a representative office, stays 180 days in the PRC in a year. The salary is paid by the head office outside the PRC. The RO is granted exemption from Chinese IT since it is not engaged in any business activities. What is the tax position of the technical manager?

It is not relevant where the employee receives the salary outside the PRC. The salary is deemed to have borne by (charged to) the entity set up in the PRC if the entity is exempted from Chinese income tax, or taxed on a deemed profit basis. The deeming provision operates whether or not the salaries are recorded in the books of accounts. See SAT document Guo Shui Fa [1994] 148 and refer to table 1.
 

How to calculate the employee's working days?

Day of arrival, and day of departure shall be counted as half day respectively.

Scope of application: non-PRC domiciled individuals who hold positions both in the PRC Company and overseas Company, or who only hold position in overseas Company. See SAT document Guo Shui Fa (2004) 097.
 

What should the employee do to avoid the tax liability for worldwide income after working in the PRC for a period of five years?

The employee should leave the PRC for a period of more than 30 days continuously in the sixth year. Alternatively the employee can stay outside the PRC for an aggregate of 90 days if the absence is not continuous. By staying physically outside the PRC for that period, the employee is considered to be a non-tax resident for that particular year. The five-year period will start afresh in the sixth year.
 

Example II

 

IIT Computation

An employee is assigned to work in Guangzhou. Monthly salary is HK$25,000 (=RMB26,000, including housing allowance of RMB3,000). The employer pays the salary outside the PRC. The employee rents a flat in GZ, and obtains the tax invoice from the landlord.

(A) The employee bears the IIT

Taxable income = Salary - Standard deduction - tax-exempt income

IIT payable = taxable income x tax rate - quick deduction

Taxable income = RMB26,000 - RMB4,800 - RMB3,000 = RMB18,200

IIT payable = RMB18,200 x 20% -375 = RMB3,265(Note: The tax rate of 20% and quick deduction 375 are obtainable from Table II.)

(B) The employer bears the IIT

Taxable income = (salary - standard deduction - tax-exempt income - quick deduction) / (1 - tax rate)

IIT payable = Taxable income x tax rate - quick deduction

Taxable income = (RMB26,000 - RMB4,800 - RMB3,000 - 1,375) / (1 - 25%) = RMB22,433.33

IIT payable = RMB22,433.33 x 25% - 1,375 = RMB4,233.33(Note: The tax rate 25% and quick deduction 1,375 are obtainable from Table II.)

The employer and the employee may reach an agreement on how the IIT is to be shared.

 

Table II: PRC Income Tax Rates and Brackets in RMB

* Note the income brackets, tax rates, and quick deduction have been changed since 2011-09-01, amended again and effective on 2019-01-01

  Tax born by employee Tax born by employer Tax rate Quick deduction
1 Less than 500 Less than 475 5% 0
2 501 - 2,000 476 - 1,825 10% 25
3 2,001 - 5,000 1,826 - 4,375 15% 125
4 5,001 - 20,000 4,376 - 16,375 20% 375
5 20,001 - 40,000 16,376 - 31,375 25% 1,375
6 40,000 - 60,000 31,376 - 45,375 30% 3,375
7 60,001 - 80,000 48,376 - 58,375 35% 6,375
8 80,001 - 100,000 58,376 - 70,375 40% 10,375
9 Over 100,000 Over 70,375 45% 15,375

 

Example III

Taxation on year-end bonus

An employee working for an FIE is paid a year-end bonus of RMB52,000. The liability for IIT is computed as below:

Dividing the bonus by 12 months, then the quotient is used to determine the tax rate and quick deduction. RMB52,000 / 12 = RMB4,333.33

Taxable income = Year-end bonus (No standard deduction) = RMB52,000

IIT payable = taxable income x tax rate - quick deduction
= RMB52,000 x 15% - 125* (Note)
= RMB7,675

Statutory deduction & Items exempted from IIT

  1. Standard deduction RMB1,600 and addition deduction RMB3,200;
  2. Social security contributions within prescribed limits (See SAT document Guo Shui Fa (2006) No. 10);
  3. The following items with supporting tax invoices: housing allowance; meal allowance, language training fees, child education fees, the passage for visit to home country, etc. See SAT document Guo Shui Fa (1997) No. 54.

 

Taxation on Directors' Fee

Directors' fee and remuneration of senior staff, is subject to tax under the independent service category. See Guo Shui Fa (2004) No. 097

Standard deduction : Standard deduction is RMB1,600 for income not exceeding RMB4,000; 20% for income of RMB4,000 or above

Table III: Tax rates and brackets (Independent Services)

Bracket Including tax
(Employee bears tax)
Excluding tax
(Company bears tax)
Tax Rate Quick Reduction
1 Not exceeding 20,000 Not exceeding 16,000 20% 0
2 Over 20,000 to 50,000 Over 16,000 to 37,000 30% 2,000
3 Over 50,000 Over 37,000 40% 7,000

 * Note : the above tax bracket, tax rate and quick deduction has been amended since 1st Jan 2019. 

The director of an FIE receives a fee of RMB80,000 in the month. The individual income tax liability is as follows:

Taxable income = RMB80,000 - (1 - 20%) = RMB64,000
IIT payable : RMB64,000 x 20% = RMB12,800;
(50,000 -20,000) x 20% x 50% = 3,000;
(64,000 - 50,000) x 20% x 100% = 2,800;
12,800 + 3,000 + 2,800 = 18,600

Alternatively, the computation can be done by using the quick deduction as below

IIT payable = RMB64,000 x 40% - 7,000 = RMB18,600

 

What if the director only stays a few days in the PRC for each month?
If the director's is paid by the FIE, the director's fee should be taxed in whole; if the director's fee is paid by the holding company and receives the salaries outside the PRC, the director's fee is taxed on a time-apportioned basis.

See SAT Bulletins [1994] 89, [1995] 125, [2004] 97 {Read}, and [2007] 946 {Read}.


 

 

Individual Income Tax Law amendment On Sept 1, 2011 (Partly repealed)

A Summary of the Relevant Individual Income Tax Law (the IIT Law) for Non-residents Working Temporarily in China [Read] (Note : The income tax tables have been repealed by the 2018 amendment to the IIT law)

 

 


Individual Income Tax Law amendment on Sept 1, 2018 and effective on 1st January 2019

The 2018 amendment of the PRC IIT law has impact on the following areas:

 

A. Impact on disposable income (after-tax income)

The taxpayer has more after-tax income than previously (before taking into consideration of social security contribution). Note that the after-tax income is calculated assuming that the same level of social security contribution as previously. 

On the one hand, the PRC IIT law is amended. On the other hand, the PRC government has strengthened the collection of the social security contribution, by changing the collecting agent from social security authority to the tax authority that uses a higher base for collecting social security contribution. If the change in social security contribution is taken into account, the taxpayer is worse off than before.

 

B. Definition of PRC tax resident

The definition of tax resident has changed. Previously, an individual became a tax resident if he/she resides for 365 days in China. The new PRC IIT law shortens the period of his/her stay in China to 183 days in a year. The threshold has been lowered for becoming a tax resident in China.

 

C. the 183-day rule to determine the resident status

The method of counting days for which an individual employee works in China, remains unchanged. That will not be affected by the 2018 amendments.

The State Administration of Taxation (the SAT) has issued several notices to elaborate on the 183-day rules, including SAT Notices [1994] 89 (partly repealed), [1994] 148, [1995] 125, [2004] 97 and [2012] 16 respectively. See relevant notices issued by the SAT on this issue: [here]

 

D. the 5-year tax exemption rule

Under the old IIT law, there is a 5-year exemption period before the taxpayer working or living in China is liable to pay tax on worldwide income. Under the new IIT law, the exemption period is removed.

Article 4 (the Implementation Regulations of the new IIT Law) provides that foreign income derived by an individual who is not domiciled in China but has resided in China for 183 days in aggregate in a year and consecutively for a period of not exceeding 6 years (previously 5 years) is exempt from IIT if such income is neither sourced in China nor paid by a Chinese enterprise or individual; where the non-PRC domiciled individual leaves China for a duration exceeding 30 days at a point of time during any year in which his residence in China is more than 183 days, the counting of number of years, in which that individual has acquired tax residence in China, shall start afresh.

 

E. How to determine an individual's domicile (habitual abode) in China?

In general, an individual is considered to be domiciled in China due to the existence of his/her household registration (户籍 "huji" in Mandarin), family connections, economic ties or interests in China. The term "habitual abode" has a legal meaning, and it does not refer to the physical place with which an individual stays for certain period of time. An individual may reside in China because he works, pursues studies in a university, visits friends, or does travelling in China. After he has finished the employment contract, grauated from the university, paid the visits or done the travelling, he/she will return to where he/she comes from. That individual is not considered to have a hatual abode in China.

See the detailed explanations for "residence" and "habitual abode" given by the State Administration of Taxation (bilingual version) [read]

Note that there is a treaty override provision in Chinese tax laws. One should also examine the rules for the determination of residence in tax treaties that China has concluded with other treaty countries. See PRC tax treaties. [read]

 

F. IIT - Tax brackets, tax rates, and quick deductions

Annex 2 of State Administration of Taxation, Public Notice [2018] 056

个人所得税预扣率表一

Provisional Individual Income Tax Deduction, Table 1

(居民个人工资、薪金所得预扣预缴适用)

Applicable to tax resident for withholding tax on wages, salaries

 

级数

Bracket

累计预扣预缴应纳税所得额 (全年计算)

Cumulative provisional taxable income (on annual basis)

预扣率(%)

Withholding tax rate (%)

速算扣除数

Quick deduction

1

不超过36000元的部分

Not exceeding 36,000

3

0

2

超过36000元至144000元的部分

Exceeding 36,000 and not excedding 144,000

10

2520

3

超过144000元至300000元的部分

Exceeding 144,000 and not exceeding  300,000

20

16920

4

超过300000元至420000元的部分

Exceeding 300,000 and not exceeding 420,000

25

31920

5

超过420000元至660000元的部分

Exceeding 420,000 and not exceeding 660,000

30

52920

6

超过660000元至960000元的部分

Exceeding 660,000 and not exceeding 960,000

35

85920

7

超过960000元的部分

Exceeding 960,000

45

181920

Note that the cumulative provisional method can save taxes for those to receive fluctuating monthly income in the tax year.

 

居民个人工资、薪金所得(参考用)

Applicable to resident for withholding tax on wages, salaries (for reference)

级数

Bracket

应纳税所得额(每月计算)

Taxable income (Monthly)

税率(%)

Tax rate (%)

速算扣除数

Quick deduction

1

Not exceeding 3,000

3

0

2

From 3,001 to 12,000

10

210

3

From 12,001 to 25,000

20

1,410

4

From 25,001 to 35,000

25

2,660

5

From 35,001 to 55,000

30

4,410

6

From 55,001 to 80,000

35

7,160

7

Exceeding 80,000

45

15,160

 

个人所得税预扣率表二 - 居民个人劳务报酬所得预扣预缴适用

Individual Income Tax Rate, Table 2 - Applicable to residents for income from supply of services

 

级数

Bracket

预扣预缴应纳税所得额

Provisional withholding taxable income

预扣率(%)

Withholding tax rate (%)

速算扣除数

Quick deduction

1

Not exceeding 20,000

20

0

2

From 20,001 to 50,000

30

2000

3

Exceeding 50,000

40

7000

 

 

个人所得税税率表三 Individual Income Tax Rate, Table 3

非居民个人工资、薪金所得,劳务报酬所得,稿酬所得,特许权使用费所得适用

Applicable to wages, salaries, service fees, copyright royalties, and licensing income received by non-tax residents

 

级数

Bracket

应纳税所得额

taxable income

税率(%)

Tax rate (%)

速算扣除数

Quick deduction

1

Not exceeding 3,000

3

0

2

From 3,001 to 12,000

10

210

3

From 12,001 to 25,000

20

1410

4

From 25,001 to 35,000

25

2660

5

From 35,001 to 55,000

30

4410

6

From 55,001 to 80,000

35

7160

7

Exceeding 80,000

45

15160

 

G. Computation of IIT payable (illustraded example - IIT computed on monthly basis)

A senior manager earns a monthly salary of RMB50,000. He is entitled to the following deductions: various social securities contribution RMB4,000; child eduction expenses RMB1,000; home mortgage loan interest RMB1,000. Total deduction for specified deductible items is RMB6,000. In addition, he is entitled to a general deduction of RMB5,000. In total, the amount of statutory deductions is RMB11,000.

  Income Rate IIT
0     11,000.00 0%                -  
1      3,000.00 3%           90.00
2      9,000.00 10%         900.00
3    13,000.00 20%      2,600.00
4    10,000.00 25%      2,500.00
5      4,000.00 30%      1,200.00
6                -   35%                -  
7                -   45%                -  
     50,000.00        7,290.00

 

The above computation can be reconciled with the alternative computation method using quick deductions:

[(taxable income - general deduction - specified deductible items) x applicable tax rate - quick deductions]

= (50,000 - 5,000 - 6,000) x 30% - 4,410 

= 7,290

[note : the applicable tax rate 30% and quick deduction 4,410 can be found at table 1 above.]

 


 

 

H. Comparing between the month-by-month and the cumulative computation methods

 

个人所得税累计预扣法    1st month   2nd month      Year-to-date total
(1) IIT computation using the cumulative method    首月   次月      累计
                 
         RMB   RMB       RMB 
                 
工资   Salaries       13,500.00    13,500.00       27,000.00
奖金   Bonus                    -        4,500.00         4,500.00
   总工资收入     Total employment income [a]     13,500.00    18,000.00       31,500.00
基本扣除 Basic deductions [b]       5,000.00      5,000.00       10,000.00
专项扣除 Specified deductions [c]       2,560.00      2,560.00         5,120.00
企业年金   Enterprise annuity payment            540.00         540.00         1,080.00
商业健康保险 Commercial health insurance payment            200.00         200.00            400.00
   其他扣除     Other deductions [e]          740.00         740.00         1,480.00
学前教育学费 Education fee for kindergarten         1,000.00      1,000.00         2,000.00
儿子小学学费 Education fee for primary schooling         1,000.00      1,000.00         2,000.00
继续教育   Adult's continuing education            400.00         400.00            800.00
按揭贷款利息 Mortgage interest payment         1,000.00      1,000.00         2,000.00
租金支出   Rental expenses                    -                   -                      -  
赡养老人   Elderly parent expenses            800.00         800.00         1,600.00
   专项附加扣除     Specified additional deductions [d]       4,200.00      4,200.00         8,400.00
                 
应缴所得税   IIT payable [note 1]            30.00         340.00            195.00
                 
用速算扣除法复核             Year-to-date
(2) Reconciliation with the quick deduction computation    1st month   2nd month      total
                 
工资收入 Total employment income [a]     13,500.00    18,000.00       31,500.00
基本扣除 Basic deductions [b]      -5,000.00     -5,000.00      -10,000.00
专项扣除 Specified deductions [c]      -2,560.00     -2,560.00        -5,120.00
专项附加扣除 Specified additional deductions [d]      -4,200.00     -4,200.00        -8,400.00
其他扣除 Other deductions [e]         -740.00        -740.00        -1,480.00
[(a-b-c-d-e)]  taxable income after all deductions         1,000.00      5,500.00         6,500.00
税率   applicable tax rates   3% 10%     3%
                   30.00         550.00            195.00
速算扣除数 quick deduction                    -           210.00                    -  
应缴所得税   IIT payable [note 2]            30.00         340.00            195.00

 

如果采用累计预扣法计算,第2个月之个人所得税为人民币 165 = 195-30. 如果按照旧方法每个月计算,第2个月之个人所得税款为人民币340. 这是因为第二个月多了一项奖金,令部分收入需要按照10% 计算征收。

If the tax is computed using the cumulative method, the IIT for 2nd month is 195-30 = RMB165. If the tax is computed month-by-month, the IIT for 2nd month is RMB 340 because some of the income is taxed at 10% due to the bonus received.

 

[Note 1] The excel formula for the IIT computation is : 

Month-by-month computation = MAX((a-b-c-d-e)*{0.03,0.1,0.2,0.25,0.3,0.35,0.45}-{0,210,1410,2660,4410,7160,15160},0)

Year-to-date cumulative computation = MAX((a-b-c-d-e)*{0.03,0.1,0.2,0.25,0.3,0.35,0.45}-{0,2520,16920,31920,52920,85920,181920},0)

[Note 2] The formula for quick deduction method is :

Tax payable = taxable income after deductions x applicable tax rate - quick deduction

 


 

 

Regulation issued by the State Council

 

  • Implementation Regulations of The PRC Individual Income Tax Law, promulgated under State Council decree No. [2018] 707, effective on 1st January 2019
  • Notice of the State Council on Additional Deduction for Specified Items under the IIT Law, under decree No. Guo Fa [2018] 041 
  • 国务院关于印发个人所得税专项附加扣除暂行办法的通知,国发 【2018】041号

 

 

 


 

Administrative Tax Rules (in Chinese)

  • Change of Form and Contents for Tax Payment Certificates, issued by the State Administration of Taxation under Administrative Order [2018] 055
  • Issue on change-over arrangements for the IIT Law, issued by the State Administration of Taxation under Administrative Order [2018] 056
  • Taxpayer Identification Number [TIN], issued by State Administration of Taxation under Administrative Order [2018] 059
  • Additional Deduction for Specified Items (Pilot Run), issued by the SAT under Administrative Order [2018] 060
  • IIT Withholding, Payment and Filing (Pilot Run), issued by the SAT under Administrative Order [2018] 061