2019 NEW IIT LAW – CHANGES IMPACTING EXPATRIATED EMPLOYEES

By Tanny Chow, Stone Compass Associates

January 06, 2019

 

The new Individual Income tax (IIT) law has already taken effect on 1 January 2019. Some of the changes impacting foreign taxpayers include the following:

 

DEFINITION OF ‘TAX RESIDENT’ AND ‘NON-TAX RESIDENT’

The new IIT law provides a clear definition of residency from a tax perspective. Tax resident in China is defined as one foreign individual who are domiciled in china, or has no domicile, and has resided in China for a total of 183 days or more in a calendar year.

 

SIX-YEAR RULE FOR EXPATRIATED TAXPAYERS

The new IIT law extends the well-known five-year rule to six years for foreigners domiciling in China. Foreign tax resident, who stays in China for more than six years, is subject to IIT on his / her worldwide income (source of income earned inside and outside of China). Such rule applies also to tax residents from Hong Kong, Macau and Taiwan.

To qualify for tax exemption on the overseas source of income, foreign tax residents must leave China for a period of at least 31 days consecutively before the six-year term ends. Advance filing with local tax authority is required. In the past, expatriated employees usually chose to leave China for at least 31 consecutive days, or 91 days cumulatively in a year. At the time of this writing, it is unknown as to whether the latter method continues to be acceptable by tax authorities. Foreign taxpayers should observe for any subsequent guidelines and updates by tax authorities.

 

TAX-EXEMPTED PERSONAL ALLOWANCES VS SPECIAL ITEMIZED DEDUCTIONS

Prior to 1 January 2019, expatriated employees were eligible to claim certain tax-exempted personal allowances some of which include housing accommodation, laundry, flight ticket for home visit, education ,etc. With the implementation of the new IIT law, six special itemized deductions are introduced, namely children’s education expense, continuing education expenses, medical expenses for critical illnesses, housing mortgage interest expense, housing rental expense and caring expense for the elderly.

At present, foreign employees can continue to claim those tax-exempted personal allowances up to the end of year 2021. Between 2019 and 2021, foreign employees can opt for either option: personal allowances or itemized deductions. The option once chosen must be followed through during a calendar year. Effective 1 January 2022, both foreign and domestic employees adhere to the same IIT law.

 

EQUITY BENEFITS AND INCENTIVES

The new IIT law makes no change to the tax calculation on equity benefits such as stock options, restricted stock, stock appreciation rights, etc. If within the same year tax payer receives several equity incentives, all equity benefits would be combined when calculating IIT. Calculation is as below:

Tax due =   {  Equity income      x   Applicable tax rate   –   Quick deduction } x    No. of months in China                                  No. of months in China

 

The table below depicts applicable tax rates and quick deduction under the new IIT law.

At present, equity benefits is not taxed as part of the comprehensive income until 31 December 2021. New guidelines and updates shall be available for treatment thereafter. Note: comprehensive income includes wages and salary, remuneration for personal services, remuneration for authors, and royalty.

 

Bracket

Monthly taxable comprehensive income (RMB)

Tax rate (%)

Quick deduction

1

Up to 3,000

3

0

2

Exceed 3,000 and up to 12,000

10

210

3

Exceed 12,000 and up to 25,000

20

1,410

4

Exceed 25,000 and up to 35,000

25

2,660

5

Exceed 35,000 and up to 55,000

30

4,410

6

Exceed 55,000 and up to 80,000

35

7,160

7

Exceed 80,000

45

15,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YEAR-END BONUSES

Tax on year-end bonuses are calculated separately and not to be included in the comprehensive income until 31 December 2021, unless taxpayer opts for such option. Thereafter, it combines with comprehensive income to arrive at IIT. Calculation is as below:

Tax due   =      Year-end bonus      x   Applicable tax rate     –     Quick deduction

                                                   12 months

 

Refer to the same table above for applicable tax rate and quick deduction.

Have a question? Get in touch with Stone Compass for a consultation at info@stone-compass.com