On 31 August 2018, the Standing Committee of the National People’s Congress issued the New Individual Income Tax law which has just come into effect with full implementation from the 1st of January 2019. Some changes were effective from the 1st of October like the new IIT brackets rate and the new quick deduction of 5,000 RMB to be deducted to calculate the taxable salary but just at the end of the year the National Tax Bureau disclosed all the details of the new law, such as the new “five-year rule”.
This article will provide you an insight on the new landscape of the New Chinese Individual Income Tax law (IIT).
Definition of Resident Taxpayer
One of the amendments to the new Tax Law is that foreign nationals working and living in China for more than 183 days a year are now considered tax resident and shall pay taxes in China on their worldwide income, which is a rule adopted by many countries such as the US and Italy too. Before the Amendment, the foreign workers in China were taxed only on their Chinese income, unless they were residents of China for at least five years. Only after five years were such individuals taxed on their worldwide income.
The newly introduced 183-day rule reduces the amount of time a foreign worker has to spend in China to be considered a tax resident. However, in practice, you will continue to pay taxes on your Chinese income since article 4 of the new law specifies that only foreign taxpayers who have resided 183 days or more in China per year for six consecutive years will be subjected to IIT on their worldwide income, starting from the seventh year.
Hence, if you are a non-resident foreigner worker and leave the country for more than 30 consecutive days, in a single trip during any period between the six years and fill the record filing with the tax bureau in charge, you will not be subject to pay taxes in China on your worldwide income. You will be taxed only on the China-sourced income, in this way you shall reset the time of the six-year period.
Otherwise an individual who resides in the PRC for a cumulative period of 183 days in a year and does not leave the country for more than 30 days in a single trip within six years, will be required to pay IIT on any income derived from both within and outside of China starting from the sixth years. This includes rental or investment income from home countries.
Taxation brackets
From the 1st of October 2018 to the 31st of December 2018 the quick deduction of 3,500 RMB for Chinese people and 4,800 RMB for Foreigners has been unified and raised to 5,000 RMB. This is still from the same date there are tax cuts skewed toward low – and middle-income people. The new tax law stipulates that, after the amendment, some tax brackets of individual income tax will be further optimized and adjusted. The three lower tax brackets of 3%, 10% and 20% will be widened, and the tax brackets of 25% narrowed, while the three higher tax brackets of 30%, 35% and 45% remain unchanged.
Let us have a look at the new tax brackets:
| Bracket | Monthly income (RMB) | IIT rate (%) | Quick deduction |
| 1 | not exceed 3,000 | 3 | 0 |
| 2 | 3,000-12,000 | 10 | 210 |
| 3 | 12,000-25,000 | 20 | 1410 |
| 4 | 25,000-35,000 | 25 | 2660 |
| 5 | 35,000-55,000 | 30 | 4410 |
| 6 | 55,000-80,000 | 35 | 7160 |
| 7 | More than 80,000 | 45 | 15160 |
IIT Tax Deductions
According to the article 7 of the new IIT, from 1 January 2019 to 31 December 2021, foreign individuals who meet the individual conditions to be Chinese tax residents can choose to have the special additional deduction for the IIT, including:
- Child education expenses
- self-education
- Health care cost
- Interest on housing loan
- Housing rent
- Parent’s supporting costs
Or they can choose not to have these reductions on their IIT and continue to enjoy the preferential policies for the above item.
In any case, foreign individuals who are not China resident tax payers will no longer enjoy above descripted, from 1 January 2022. They will enjoy special additional deductions in accordance with the provisions.