China Individual Income Tax – An Overview of the Regulations in 2020
Vicky Zhang – Finance Specialist
The newly revised China income tax law has been promulgated by the State Council.
It is the fourth amendment to the regulations on the implementation of the Individual Income Tax Law, seven years after the last amendment.
In the article, we explain these new regulations and how you can use these if you are planning to hire employees in China.
- China Individual Income Tax Rates
- Deductions and Exemptions
- Tax Law for Foreigners
- China Individual Income Tax Return
Income can be divided into 9 parts:
- Wages and salary;
- Income from remuneration for personal service;
- Income from the author’s remuneration;
- Income from the use of the special envoy’s authority;
- Operation and sales income;
- Income from interest, dividends, and royalties;
- Income from lease of property;
- Income from the transfer of property;
- Extra income.
The first four kinds of income should be combined in the annual income calculation.
And different kinds of income have different tax rates.
Take wages and salaries for example, according to the China individual income tax law, the threshold for individual income tax is 5,000 yuan.
And the new tax rate expanded the base tax brackets, so taxpayers can enjoy the tax reduction to varying degrees.
In the tables below, you can check the different rates for the income levels.
Personal Income Tax Withholding Rates – Table 1
(Applicable to the withholding of individual residents’ wages and salaries)
|Level||Annual Taxable Income||Rate (%)||Calculation of Deductions|
|1||No more than 36,000||3||0|
|2||Between 36,000 and 144,000||10||2,520|
|3||Between 144,000 and 300,000||20||16,920|
|4||Between 300,000 and 420,000||25||31,920|
|5||Between 420,000 and 660,000||30||52,920|
|6||Between 660,000 and 960,000||35||85,920|
|7||More than 960,000||45||181,920|
Personal Income Tax Withholding Rates – Table 2
(Applicable to withholding and prepayment of income from personal remuneration for personal services)
|Level||Annual Taxable Income||Rate (%)||Calculation of Deductions|
|1||No more than 20,000||20||0|
|2||Between 20,000 and 50,000||30||2,000|
|3||More than 50,000||40||7,000|
The formulas for the calculation of the taxable income and the tax payable are as followed:
- Taxable income = (Total income) – (Initial deduction) – (Special additional deduction/Tax-deductible allowance (especially for foreigners)
- Tax payable = (Taxable income*Tax rate) – (calculation of deduction)
Special Deductions and Other Deductions
A big part of the new China individual income tax law is about deductions.
These include the “special deduction” and “other deductions” that already exist, as well as the “cumulative special additional deductions” that took effect on January 1, 2019.
The “special deduction” includes four items:
- Basic endowment insurance;
- Basic medical insurance;
- Unemployment insurance;
- Housing accumulation fund.
The “other deductions” category includes:
- Commercial health insurance;
- Tax-deferred pension insurance;
- Original value of property;
- Taxes and fees that are allowed to be deducted.
Cumulative Special Additional Deductions
The cumulative special additional deductions, which were implemented in January 2019, cover five items:
- Children’s education;
- Support to the old people;
- Interest in housing loans;
- Housing rent;
- Continuing education.
According to the State Administration of Taxation, the items under the “cumulative special additional deduction” should be filled in the accumulated amount of deduction for children’s education, support to the old people, housing loan interest or housing rent and continuing education that taxpayers can enjoy as of the current month.
Another “medical deduction” for serious illness, which began in 2019, is not reflected in the deductions this time.
To this, according to the State Administration of Taxation (SAT), “medical deduction for serious diseases” should be handled by taxpayers when the annual final settlement is made, and it is not necessary to fill in the month form.
After the introduction of the special additional deduction policy, the personal income tax of employees has been greatly reduced, which brings good benefits to employees.
1) What are the meanings of resident individuals and non-resident individuals?
According to the new China individual income tax law, individuals who have a domicile in China or do not have domicile but have resided in China for a total of 183 days in a tax year are resident individuals.
Residents shall pay individual income tax in accordance with the provisions of the Law on income derived by them from sources within or outside The People’s Republic of China.
That means 183 days will be the standard for judging whether a taxpayer is a resident or a non-resident.
2) How to calculate the number of days that foreigners (including Hong Kong, Macao, and Taiwan residents) live in China?
In accordance with the provisions of the law, the number of days of residence in China shall be counted as 24 hours on the day of stay in China.
If it is less than 24 hours, it shall not be counted as the number of days of residence in China.
3) Tax-free arrangements for the length of time a foreign taxpayer spends in China
In order to attract foreign investment, encourage foreign nationals to work in China and promote foreign exchanges, the Regulations on the Implementation of the Individual Income Tax Law has the preferential system of tax exemption for overseas income paid by overseas investors in the previous regulations, and relax the conditions for tax exemption.
First, individuals without domicile within the People’s Republic of China who have resided in China for an accumulative period of 183 days but less than six years shall be exempted from individual income tax on their income derived from sources outside of China and paid by units or individuals outside China upon filing with the competent tax authorities.
The key to this provision is the distinction between “cumulate” and ”continuous”.
If you stayed in China for 183 days in total the accumulative period can be continued in the same year.
If you stayed less than 183 days during one year of the previous 6 years, the accumulative period cannot be continued, and the number of the years needed to be recalculated starting from the year after the interruption.
For example, for a foreigner that lived in China for 183 days in 2019 and 2020, but lived in China for only one month in 2021, the consecutive years should be recalculated from 2022.
Second, in any given year, the number of consecutive years of residence shall be recalculated as long as there is one departure from China for more than 30 days.
For example, a foreigner who lived in China continuously for more than 183 days in 4 years but left China for more than 30 days in the fifth year, the number of days should be recalculated from the next year.
Third, at present China has signed bilateral tax agreements or arrangements with more than 110 countries and regions, which to some extent avoid the possibility of double taxation on taxpayers.
If relevant problems are encountered, the individual income tax of foreigners shall be further determined according to the specific provisions of the tax agreement.
4) Can foreigners enjoy both allowance and cumulative special additional deductions?
During the period of January 1, 2019, and December 31, 2021, foreigners can continue to enjoy the allowance.
However, if they choose this, they cannot choose cumulative special additional deduction. They can only choose one of the two.
Starting from January 1, 2022, foreign individuals will no longer be able to choose eight subsidies and will be entitled to special additional deductions in accordance with regulations.
In the new China individual income tax law, from January 1, 2019, taxpayers will have to file the income tax return.
The income tax return is the act of an individual resident to calculate the annual final individual income tax payable annually after combining the wages and salary, income from remuneration for personal service, income from author’s remuneration, income from the use of the special envoy’s authority obtained within a tax year, and after deducting the annual advance tax payment, to calculate the amount of refunded or supplementary tax payable, to report to the tax authorities and carry out the tax settlement.
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