China’s Individual Income (IIT) Tax Reform 2019:
Impact on Foreign Nationals
China Individual Income Tax 2019 will come into force on January’s first. The new law will make fundamental changes in the current tax region which in fact will nearly impact every taxpayer in China, this is the reason why the IIT reform has attracted so much attention.
Aside from local employees, foreign nationals also will be affected. This article will look at the impact produced by the new China Individual Income Tax 2019 (IIT) law on national foreigners, and discuss the following:
- Changes in the foreign tax calculation
- Clarifying China’s five-years rule
- Foreign employee allowances and deductions in China
- Foreign annual bonus in China
- Tax obligations for expatriates in China
Changes in the tax calculation in China
Timing is already quite tight because on January’s first will be placed the implementation of the new law and the calculation method would be changed from the monthly calculation method to annual calculation method and the payroll or the filling process might be changed.
In the payroll process, the company should just to help employees get itemized deductions and what is the detail process, to prepare for the payroll, pay slip and also the calculation.
In the following table you can find the new calculating formulas of China’s Individual Income (IIT) reform:
- Note*: The income amount remuneration for personal services, author’s remuneration and royalties shall be the balance after deduction of 20% for expenses from the income. The income amount of the author’s remuneration shall be reduced and computed at 70%.
HROne has developed a China employment cost calculator to facilitate the understanding of the total cost breakdown of an employee based in Mainland China. The calculator considers the latest Individual Income Tax Reform will come into effect on January 1st of 2019.
Find out a locally hired foreign net salary and its corresponding Individual Income Tax (IIT) schemes and social insurances (Social Security + Housing Fund) contributions.
China’s six-year rule
The 30 days’ tax break has been clarified in Article 4 of the Implementing Regulations of the Individual Income Tax law of the People’s Republic of China (2018).
The main points of interest are the following:
The maximum is six consecutive years of more than 183 days. “Not more than six consecutive years” implies that the break must be done during the sixth year at the latest otherwise on the seventh year the worldwide income will be taxed. The wording is different from the old 2011 Implementing Regulation, the old wording does not stipulate the 183 days and the break must be taken during the fifth year to avoid worldwide taxation during the sixth year. In contrast, the new 2018 Implementing Regulation use 183 days as a basis to whether an individual is considered as staying in the PRC for a tax year; implying that if an individual arrives in the PRC in the second half of the year this year will not count toward the six years.
- Leaving China for more than 30 days reset the six years. It is also important to notice that “more than 30 days” exclude 30, thus the real amount to spend outside of China is 31 days.
If an expatriate leaves China for a period of more than 30 days consecutively, the full six-year period is interrupted and restarts from zero.
How to avoid the five-year rule?
It is possible to avoid the five-year rule by taking a single trip outside of the Chinese territory for a period longer than 30 days.
Lives in China since 2012 January, stays in china for more than 183 days in one year for every year, 2017 is his sixth year, 2018 is his seventh year. Before 2018, he should leave China for more than 30 days. In this way, the calculation reset on 2017 (the sixth year), then in 2018, he will not pay the worldwide tax in China. The calculation restarts from 2018.
In simpler terms, except the 183 days and the 6 years, the taxation of Foreign Nationals based on duration of their stay in the People’s Republic of China, on salary derived in or out of China and whether it is borne by Chinese or oversea entity, remains unchanged.
Foreign employee allowances and deductions
The Ministry of Finance and State Administration of Taxation released on 2018-12-27 (effective from 2019-01-01) the Notice on Preferential Policy Convergence Problem after Modification of IIT Law. It stipulates the end of the foreign employee allowance on 2021-12-31.
Until this date, it shall be a transition period where foreign employees can choose between the foreign employee allowance or the Special Additional Deductibles, it is to be noted that the decision cannot be changed during a tax year.
The Special Additional Deductibles stipulated in the Article 6 of the New IIT Law have been clarified on 2018-12-13 (effective from 2019-01-01) by the State Council in the Circular of the State Council on Issuing the Interim Measures for Additional Special Deductions for Individual Income Tax.
It is important to note the difference between the Special Deductions and Special Additional Deductibles. The Special Deduction are deductions on the employee part of the payment to social insurance and housing fund. The Special Additional Deductibles includes:
- Expenses for children’s education (CNY 12000/year/child)
- Continuing education (CNY 3600 or 4800 /year)
- Medical treatment for critical illness (for individual born parts over CNY 15000, CNY 80000/year)
- Home mortgage interest (CNY 12000/year)
- House rental for house in the main working city (for taxpayer who does not own a house in the city) (CNY 9600, 13200 or 18000/year)
- Support for elderly (CNY 12000 or 24000 /year)
The foreign employee allowance is based on a percentage of the salary (generally between 20-30%) remains more beneficial for employee with a higher wage, whilst the new Special Additional Deductibles are likely better for lower wage employees as they are based on the amount paid.
A notable addition is the Article 13 of the Implementing Regulation that specifies that the category “other deductions specified according to the law” includes the purchase of commercial health insurance and of tax-deferred commercial pension insurance. Whilst it is yet difficult to assess how accessible the tax-deferred pension insurance might be for foreign employees; the commercial health insurance is a common perk for foreign employees.
Calculate your employees’ total cost of employment in China
Annual bonus in China
The above-mentioned Notice of the Ministry of Finance and State Administration of Taxation also gives clarification on the tax preferential treatment of annual bonus. In addition, to be a great incentive for employees, annual bonus also benefits from a beneficial tax treatment by being taxed as a separate income and thus having a lower tax rate. However, just like the Foreign employee allowance, this beneficial tax treatment of the annual bonus will end on 2021-12-31.
Tax obligations for expatriates
Before the new China’s IIT law implementation, taxpayers in China for one year or more, it is deemed as a resident individual, however, according to the Article 1 of the new IIT law, if the taxpayer stays in China for more than 183 days in one tax year, it is deemed as resident taxpayer.
In the following table you can see how the taxpayer should contribute according to the new regulation:
What is your duty as an employer?
HROne recommends employers to deeply understand and transmit the changes and impacts involved to their foreign workers. As the new reform starting on January of 2019 may affect significantly their Individual Income Tax contributions, and therefore, net salaries.
In addition to the new income tax policy becoming more complex, the tax deduction process in Chinese also ads difficulty to the overall procedure. Requiring in many cases the help of a local professional while declaring the contributions. HROne offers customized tax assistance solutions for foreign workers that enables to optimize the taxation in a legal manner.
All employers should ensure that their employees are informed on time about the new IIT reform, and how this one may represent changes in their salary structure.