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China Tax: The New IIT Law

In order to achieve a better income distribution, to reduce the tax burden for taxpayers, to increase the domestic consumption and to boost the economy, the People’s Republic of China has started, in June 2018, a legislative process aiming to reform the Individual Income Tax Law.

The process started on June 19, 2018, with the first draft amendment of the IIT Law, and is still ongoing and further Circulars aiming to clarify several practical issues are expected.

The new Individual Income Tax Law and the subsequent announcements have introduced significant changes in the life of Chinese citizens and foreigners working in China.

Definition of tax residency

The new definition of tax residency is more in line with the international standards and defines as tax resident the individuals who have a domicile in China or individuals without domicile in China but that have resided in China for an aggregate of 183 days or more during the single tax year. On the contrary, individuals who have resided in China for less than 183 days in aggregate during the tax year shall be deemed as non-resident.

Six-year rule

Taxpayers without a domicile in the territory of China that have not been tax resident in China for more than six consecutive years can continue to be exempted from the individual income tax on their foreign-sourced income that is not paid by a Chinese resident company or individual. If the individual leaves China for a continuous period of more than 30 days during the period of non-domicile in China, the six-period will restart. However, the six-year rule introduces a put-on-record filing required to claim tax exemption of the foreign-sourced income, and further clarifications are expected to be provided.

No-taxable area increased to 60,000 CNY

The no-taxable area has been raised to 5,000 CNY monthly (or 60,000 CNY yearly). Previously, Chinese citizens were entitled to a threshold of 3,500 CNY monthly, while foreigners were eligible to deduct 4,800 CNY from their monthly income.

Income consolidation and new tax brackets

Income from salaries and wages has been consolidated with the income from the provision of personal services, royalties and author’s remuneration into the comprehensive income. Resident taxpayers will be taxed on an annual basis, and the progressive tax rates have been revised: tax brackets have been widened for lower tax rates.