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China Tax: Special additional deductions for tax residents

A draft issued on October 20, 2018 of the “Interim Measures for Special Additional Deductions of Individual Income Tax” has introduced some itemized categories of expenses that can be deducted by the taxpayer when calculating the personal income tax starting from January 1, 2019.

In order to clarify the implementation of the special additional deductions, the State Council has issued on December 13, 2018 the Circular Guo Fa [2018] no. 41 on “Issuing the Interim Measures for Additional Special Deductions for Individual Income Tax”, followed few days after by the Announcement no. 60 [2018] of the State Administration of Taxation on "Operating Measures for Additional Special Deductions for Individual Income Tax (for Trial Implementation)"

From January 1, 2019 every China tax resident can, if certain conditions are satisfied, reduce his/her tax burden by deducting additional expenses related to children’s education, continuing education, critical illness medical care, housing mortgage interest, house rent and elderly care.

Taxpayers can enjoy the additional special deductions in two alternative ways:

  • through the employer, who will act as withholding agent. In this case the taxpayer shall provide the employer with information related to additional special deductions using the “deduction information sheet”; or

  • by claiming the deductions in the yearly final settlement (from March 1 to June 30 of the following year), providing the tax bureau with the relevant form.

The deduction information sheet shall contain relevant information that are required in order to enjoy the deductions and shall be submitted by the taxpayer to the employer, who cannot refuse to apply the deductions during the withholding of the individual income tax.

The taxpayer shall also keep the relevant materials and documentation, along with the deduction information sheet, for a period of five years for any future inspection. The employer is also required to keep the deduction information sheet provided by the taxpayer for the same amount of time.

The special additional deductions represent a further measure in order to reduce the tax burden of the chinese tax residents and will be implemented from January 2019 along with the new individual income tax law. A foreign employee who is a China tax resident can enjoy the special additional deductions (if he/she is entitled), or can continue to enjoy the existing deductions provided to foreign citizens.

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