China releases new rules for its individual income tax reform

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China is continuing to reform its Individual Income Tax (IIT) regime. After recently revising its Individual Income Tax Law, China has released several more rules to reshape the country’s IIT regime. These rules include the new Implementing Regulations for Individual Income Tax Law (the Implementing Regulations), additional special deduction rules (Guo Fa [2018] No. 41 and SAT Bulletin [2018] No. 60), tax withholding rules (SAT Bulletin [2018] No. 56 and SAT Bulletin [2018] No. 61), self-filing rules (SAT Bulletin [2018] No. 62) and transitional rules for IIT incentives (Cai Shui [2018] No. 164). These new rules are effective from 1 January 2019.

These new rules:

  • Adjust the “6-year rule” under the tax resident concept, making it possible for expatriates working in China who qualify as Chinese tax residents to still avoid PRC IIT on their worldwide income;
  • Introduce for Chinese resident taxpayers a set of additional special deductions, which expatriates working in China can choose to enjoy instead of the currently available tax-exempted allowances for expatriates;
  • Clarify preferential tax treatments for IIT incentives during transition periods to solve uncertainties taxpayers may encounter under the new IIT regime;
  • Introduce the accumulative IIT withholding method for withholding agents to withhold resident taxpayers’ salary and wages income;
  • Revise the anti-avoidance rule, but high-net-worth individuals still need to pay attention to follow-up rules;
  • Delete the controversial “deemed sales rule” in the draft Implementing Regulations.

This article will introduce the important changes to the old IIT regime and discuss their implications for both employers and employees.

Type

 

Item eligible for deduction

 

Deduction amount (RMB)

 

Children’s education

 

Pre-school education fees (from 3 years old) to higher education fees (doctoral)

1,000/month per child
 

Continuing education

 

Academic (degree) education fees for education received in China

400/month
 

Education fees for professional licences

3,600/year
 

Housing loan interest

Loan interest on a taxpayer’s first house in China purchased for the taxpayer or for the taxpayer’s spouse 1,000/month
 

Housing rental fees

Housing rental fees when the taxpayer or taxpayer’s spouse owns no house in the taxpayer’s main working city 800, 1,100 or 1,500/month depending on the city
 

Caring for the elderly

 

Expenses related to caring for the elderly
parents (60 or older) and grandparents
(60 or older with no living children)

If the taxpayer is an only child 2,000/month
If the taxpayer is not an only child No more than 1,000/month
 

Medical treatment for
serious disease

Medical expenses exceeding RMB15,000
borne by an individual under the national
medical insurance programme
Deduct according to actual amount,
capped at 80,000/year

 

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