Major Amendments to the China Individual Income Tax Law 2018
On 31 August 2018, the Chinese Government released the newly amended Individual Income Tax Law (new IIT Law). This is the 7th revision to the law since its implementation in 1980. This amendment introduced the concept of comprehensive income and is arguably the largest amendment made to the law to-date: in terms of the scope and importance of the changes. The new IIT Law is set to take effect on 1 January 2019.
This amendment to the IIT Law includes fundamental changes to the definition of a resident and the consolidation of various categories of income. It is grouped into four categories of labor income, including income from salary and wages, income from provision of independent personal services, income from author’s remuneration and income from royalties, into the scope of “Comprehensive Income”. One set of progressive tax rates will apply for determining the IIT. The year after the comprehensive income has been received, resident taxpayers are required to apply annually for individual income tax return during March 1st to June 30th. Non-resident taxpayers shall be taxed on a per month or per case basis.
The adjusted standard deductions and tax rates will take effect on 1 October 2018, three months prior to the date the new law becomes effective. During the period of 1 October 2018 to 31 December 2018, salaries and wages will be allowed to be deducted by RMB 5,000 to arrive at the net taxable income. Rates should be allowed to arrive at the tax payable amount without additional deductions applied.
Foreign invested companies review their payroll and IIT declaration processes and communicate the changes with their expatriate and local employees to ensure a smooth transition. Chinese individuals may want to ensure their lease agreements, education agreements, and other supporting documents are up to date in order to enjoy the new tax benefits.