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The Latest Regulations on China Individual Income Tax
 
Date: 29 Apr 2019

The Latest Regulations on China Individual Income Tax



On August 31, 2018, China’s National People’s Congress passed the draft amendments to the PRC Individual Income Tax Law (IIT), with the amendments becoming effective from January1, 2019.

New Definition for Tax Residence

One of the key revisions is the introduction of a “183-day” test to define tax residence for non-domiciled individuals.

(1) Resident individuals
  • Non-domiciled individuals are considered as tax residents for IIT purposes if they have resided in China for 183 days or more in a calendar year. Tax residents generally are subject to IIT on their worldwide income.
     
  • Specific exemption on non-China sourced income - “Six-year rule”
     
  • Non-domiciled individuals who have resided in China for 183 days or more in a calendar year for no more than six consecutive years may be exempt from Chinese IIT on their foreign-source income (to the extend the foreign-source income is paid by a foreign party). The six-year clock could run anew if the non-domiciled individuals stay outside China in a single trip for 30 continuous daysor more in a calendar year.
(2) Non-resident individuals
  • Non-domiciled individuals who have resided in China for less than 183 days in a calendar year are considered as non-tax residents for IIT purposes. Their China sourced income which is paid by an overseas employer and not borne by a permanent establishment which the employer has in China is exempt from IIT. Whilst China sourced income paid by a China entity is still taxable.
     
Determining number of days residing in China

In determining the number of days non-domiciled individuals residingin China, if an individual is physically present in China for less than 24 hours, that day will not be counted as a day of residence in China. The new criteria provides lenient rules for counting the days in China and in fact could reduce non-domiciled individuals IIT  burden in China.

The new regulations are expected to significantly impact foreigners in terms of their tax position and employment arrangements in China. In addition to the IIT issues, companies sending non-domiciled individuals to China should consider the corporate tax implications arising from any assignment arrangement. Hence, both employers and employees should prepare for the challenges brought by the new IIT Law.

If you require any assistance in relation to this, please contact Ms. Amie Cheung at amie.cheung@lccpa.com.hk