The new Individual Income Tax Law (IIT Law) of the People’s Republic of China, which has been implemented from the tax year 2019, has introduced the comprehensive income and new applicable deductions, revised the definition of tax residence, amended the tax brackets and modified the annual settlement mechanism.
According to the new IIT Law, resident taxpayers are required to calculate the individual income tax on the comprehensive income on a yearly basis; the comprehensive income consists of four categories of income, which are income from employment, income from personal services, income from royalties and author’s remuneration.
During the tax year, resident taxpayers shall prepay the individual income tax when the taxable income is received; the paying entities shall act as a withholding agent and must withhold and prepay the individual income tax on behalf of the taxpayers.
After the end of the tax year, the taxpayers shall aggregate the income received during the year into the comprehensive income, calculate the taxable income and reconcile the amount of tax prepaid during the year with the actual amount of IIT payable through the IIT annual settlement; if the amount of tax prepaid is lower than the amount of tax payable, the taxpayer shall make up the difference, otherwise, if during the year the taxpayer has paid tax exceeding the actual tax payable, he/she could apply for a tax refund.
The taxpayer shall handle the annual settlement between March 1 and June 30 of the year following the tax year; the filing can be performed directly by the individual, through the withholding agent, or by entrusting a professional agent.
It shall be noted that taxpayers applying for the tax refund shall provide the information of the personal bank account opened in China, while taxpayers required to make a supplementary payment could do it by means of online banking, POS, and credit cards.
Taxpayers falling in the following categories are exempted from the annual settlement of the individual income tax:
the individual shall pay overdue tax, but his/her annual comprehensive income does not exceed CNY 120,000;
the individual shall pay overdue tax, but the overdue does not exceed CNY 400;
The tax prepaid by the individual is in line with the actual amount of tax payable, or he/she does not intend to apply for the tax refund.