Highlights of Amendments to Individual Income Tax Law

National People’s Congress (NPC) Standing Committee voted through amendments to the Individual Income Tax Law (the “Amendments”) on August 31, 2018 and the Amendments will come into effect as of January 1, 2019. Recently Ministry of Finance and State Administration of Taxation released a draft of Implementation Regulations for the Individual Income Tax Law (the “New Implementation Regulations”) for seeking public opinion. It is expected that the New Implementation Regulations will be formally promulgated and take effect on January 1, 2019 in order to support the enforcement of the Amendments. 

1. Resident vs. non-resident taxpayers

The Amendments, for the first time, introduce an explicit definition of “resident” and “non-resident” concepts into the Individual Income Tax Law. The length of time used to distinguish between “resident” and “non-resident” individuals, without domicile in China, would be reduced from 365 days, which is the standard in the current law, to 183 days according to the Amendments.

The change would mean that expatriates who have been working in China for more than 183 days in a tax year, which is from January 1 to December 31, would be required to pay tax for earnings sourced from both China and overseas.

2. Five-year concession

What makes expatriates rather apprehensive is whether the five-year concession granted under the existing implementation rules will be revised. Under the existing regulations, foreign individuals who have lived and worked in China for five years or more, instead of 365 days, are subject to worldwide income tax from the sixth year onward.

The draft New Implementation Regulations reveal that the Chinese government has no intention to dramatically change the individual income tax framework for expatriates working in China. It keeps the five-year concession with small updates, aiming to continue to attract overseas talents.

Specifically, according to the draft New Implementation Regulations:

（1）for individual income tax purposes, a non-domiciled resident taxpayer is considered to have lived in China for five years if he or she has been present in China consecutively for an accumulative period of 183 days in each of past five years and each temporary absence during such five years does not exceed 30 days;

（2）once the five-year residence is established, the non-domiciled resident taxpayer will be subject to individual income tax on his or her global income from the sixth year onwards provided that he or she has resided in China for an accumulative period of 183 days in that year;

（3）the non-domicile resident taxpayer will, however, be subject to individual income tax only on his or her China-sourced income and the part of foreign-sourced income paid by Chinese residents (subject to filing with local tax authorities) in any particular year if he or she fails to meet the above five-year residence criteria.

3. Expatriates living in China for no more than 90 days in a year

The rule remains the same as the New Implementation Regulations confirm that a foreign individual who is not domiciled in China and has resided in China for a consecutive period or an accumulative period of no more than 90 days will be subject to individual income tax only on his or her China-sourced income paid by Chinese residents. 

Therefore, the implementation rules relating to expatriates’ individual income tax can be summarized in the chart below, which is subject to further clarification from State Administration of Taxation:

4. Tax thresholds increased to RMB 5,000

Individual income tax threshold will be increased to RMB 5,000 per month from the current RMB 3,500 per month. However, additional RMB 1,300 monthly deduction that expatriates are entitled to under current tax law has been abolished. 

As a transitional measure and pursuant to the Amendments, the monthly standard deduction has been increased and implemented, along with new tax brackets, from October 1, 2018.

According to Circular [2018] No. 98 issued by the Ministry of Finance along with the State Administration of Taxation, the new individual income tax increases the monthly standard deduction from RMB 3,500 to RMB 5,000 to wages and salaries received on or after October 1, 2018.

*Monthly Taxable Income = monthly income amount - the amount of social tax contributions paid by employee - RMB 5000

Income Tax = Monthly Taxable Income * Tax Rate - Quick Calculation Deduction

5. Deductions 

The Amendments classify wages and salaries, labor service remunerations, rewards of writers and royalties as comprehensive income which enjoys special tax deduction of children’s education expenditures, continuing education expenditures, medical expenses of serious illness, housing loan interests (housing rental) and elderly care expenditures (collectively “Special Additional Deductions”).

Ministry of Finance and State Administration of Taxation also announced a draft Measures for Special Additional Deductions for Individual Income Tax (the “Draft Measures”). The Draft Measures try to detail the specific scope, standard and method of each of the Special Additional Deductions.

The following is a briefing of quota of the Special Additional Deductions:

Resident taxpayers are allowed to file tax return of the comprehensive income on a tax year basis while non-resident taxpayers shall file tax return of the abovementioned four items of income on a monthly basis or based on each income item.

5. Whether expatriates may enjoy deductions?

Currently expatriate employees may enjoy the following non-taxable benefits-in-kind and they are temporarily exempt from individual income tax:

●  Housing allowance;

●  Meal and laundry allowance;

●  Relocation allowance;

●  Home leave allowance (no more than twice);

●  Travelling allowances for business travel inside and outside China;

●  Children education expenditure; and

●  Language training expenditure.

Generally, such benefits should be paid to the expatriates on a reimbursement basis or settled directly by the employer. Not all the fringe benefits, whether paid directly by the employer to the vendors or paid to the expatriates on a reimbursement basis, automatically qualify for exemption. Pre-approval process for claiming the above non-taxable benefits has now been eliminated. Instead, employers are required to perform tax registrations on non-taxable plans with local tax authorities. Chinese tax authorities have gradually intensified administration on non-taxable benefits.

The Draft Measures in principle allow expatriate employees to choose the Special Additional Deductions listed above, if they meet the conditions, or the current non-taxable benefits which however are limited to children education expenditure, language training expenditure and housing allowance. It is not clear if the other non-taxable benefit items can continue to be deductible.