Individual Income Tax China: An Overview

At Horizons, it is important for us that our readers stay up to date on the latest changes in Chinese legislation and regulations. In this vein, a huge part of doing business in China is being able to figure out the tax structures, both for businesses and for individuals.

As China has seen an increase in its overall income and a myriad of changes regarding its legal frameworks, the country’s tax structure has also evolved. In this article, we will consider;

• an overview of individual income tax in China
• how taxable income is calculated
• which sources it is derived from
• how to know if you are subject to it as a foreigner living in China. 

Income Tax in China Overview

Much like many other countries, individual income tax in China is derived from several income categories. Even though there have been some changes regarding the structure and consolidation of some of these categories (we discuss this briefly with the new amendments at the end of the article), today an individual is taxed in China according to his/her income in one of the following categories.

The 11 categories of income as enumerated by the IIT law itself are:

1. Employment income (that is, income from wages and salaries tied to some form of the formal employment contract).
2. Income from the operation of a sole proprietorship (a legal vehicle for one person to have his/her own company).
3. Income from the operation of a business through a contract or a lease.
4. Payment for labor services (that is, working as an independent contractor or providing some kind of labor service).
5. Remuneration in virtue of being an Author.
6. Royalties.
7. Interest, dividends, and profit distribution (this includes all kinds of investments, securities, and titles – and also considers capital gains).
8. Rental income.
9. Income from transfer of property.
10. Incidental income.
11. Other taxable income as determined by the Ministry of Finance of the State Council (that is, on a city ordinance or decree level, the Ministry can determine additional sources of income from which IIT can be derived).

*It’s important to mention that each one of these types of income has its own tax rates, its own specific allowable deductions, as well as subsidies and tax credits that vary due to an individual’s personal situation and a great many other factors.

In China, the tax ends on December 31st. For individuals, the law demands they file a report and pay advances on a monthly basis. The deadline date for submitting an annual report and making or negotiating payments is May 31st.

Failing to meet this deadline can lead to serious fines and sanctions. Employers in China have to submit a monthly report on their employees’ wages and to pay the tax deducted within 7 days of the end of the previous month.

Employment Income: The Most Common Source

Employment income is one of the most common bases for individual income tax in China. Having said this, it is important to understand the specifics in this category and get an idea of the numbers.

The rates applicable for monthly taxable income derived from employment contracts/ relationships are as follows:

Source: Pricewaterhouse Coopers

What Is Included in this Base?

It is important to understand that the taxable income in this category includes everything received by an employee in virtue of his/her labor.

Some employers tend to think that commissions and bonuses are not included in this calculation, but they are, as well as any sum paid directly or indirectly for the work performed for the employer.

Just to give you an idea of what this looks like, for an expat, their base could include their base salary, bonuses, expatriate premiums, cost-of-living allowances, mobility premiums, equity-based compensation, and the employer’s payments to overseas social security systems.

For a Chinese employee, it can include sums given to him/her as commissions, sales bonuses, group and individual bonuses that have nothing to do with sales but are related to specific tasks (ie. the best employee of the month bonuses), etc.

The Next Most Common Category: income from Labor Services

When the law says individual income tax is derived from labor services, it means independent service tasks such as design, medical practices, consulting in legal, accounting, the management or other services, among others.

In this category, the IIT is calculated from progressive or incremental tax rates that go from 20% to 40%. These “brackets” tend to be broader than those of the employment income rates, due to the fact that services are more specialized and tend to be better paid. The rates are as follows:

Source: Pricewaterhouse Coopers

How to Define if You Are a Resident Taxpayer?

Speaking of expats, sometimes there is great confusion for foreigners living in China as to their fiscal obligations. Becoming a tax resident in China is becoming a lot easier than before, and also has serious implications because the Chinese tax authority can talk with the individual’s home country tax authority and share information. 

Foreign employees who live in China and earn income are subject to individual income tax based on their length of residence in China, according to the following:

• Residence of fewer than 90 days in a tax year – Foreign employees who have worked in China for fewer than 90 continuous or cumulative days are taxed only on the income that they earn from Chine companies while working in China.
• Residence of at least 90 days but less than one year – These workers are subject to individual income tax for all income they have earned while in China, including from domestic and foreign companies. Earnings they earned while overseas are exempt.
• Residence of one to five years – For foreign workers who have resided in China for at least one year, the tax basis switches to a calendar year, rather than a tax year and excludes temporary absences from the country.  These workers must pay individual income tax on the income they earn in China.
• Residence of six years or more – Workers who have resided in China for six years or more are subject to individual income tax on all of their earned income, including income they received from working overseas and for domestic or foreign employers.  Read about the Five-years tax rule.

We recommend getting an accountant or talking with us in-depth if you are going to be working in China for more than a year.

*According to Chinese law, an individual is considered to be domiciled in China if he/she resides habitually in the country “by reason of his/her permanent registered address, family ties, or economic interests”. An individual with a Chinese passport or a hukou (household registration) is generally considered as a person who is domiciled in the country.

Recent Updates: The New Amendment

On August 31, 2018, the Amendment to the Individual Income Tax Law (“Individual Income Tax – IIT”) was approved by the competent authorities in China This legislation will be in force on a national level.

Several of the norms in the new amendment have already been in force since October 1, 2018, and the whole law will go into force as of January 1, 2019. With this new IIT law, the structure will switch over to what is usually called a  General Income Structure or Mode, in which the varying incomes of individuals from their salary, labor services, and remuneration and royalty incomes as authors, are taxed in a consolidated fashion.

The tax bracket calculation will change from a monthly base to an annual base. However, individual income tax will still be paid on a monthly basis and is still obliged to an annual filing from March 1 to June 30 of the next year. 

This article is a publication of Horizons. The purpose of this article is to inform our clients and readers of a changing legal landscape. It is not intended, nor should it be used, as a substitute for specific legal advice or professional legal counsel.