Individual Income Tax China and Important Things You Must Know
There are new changes about the individual income tax regulations in China. What business owners and expats need to know about these changes is that they are not exempted from paying individual income tax (IIT) from their earnings.
Under the new rules of residency, the expatriates are under the new tax changes if they have been staying in China for at least 183 days consecutively, or it was accumulated during the period that is written in the tax agreement. They are considered residents at this point.
Who Must Pay the Individual Income Tax?
Based on China’s taxation system, Chinese citizens are considered as the personal and economic ties of China. Therefore, they need always to include their worldwide income when filing taxes.
If you are a foreigner from Macau, Hong Kong, and Taiwan, you are also a foreigner based on these aspects:
- Your source of income
- If you are domiciled in China under their tax law for the purpose of taxes
- How long you have been staying in China
Income Tax Overview
A lot like other countries, the IIT in China comes from different categories. There are already changes in the structure and consolidation of some categories. The IIT in China is taxed based on these categories:
- Employment income
- Income from a sole proprietorship
- Income from business operations through lease or contract
- Labour services payment
- Remuneration in the virtue of becoming an Author
- Dividends, interest, and distribution of profit
- Rental income
- Income that came from the transfer of property
- Incidental income
- Other taxable income that is identified by the Ministry of Finance of the State Council
The new IIT Law has combined the standard deduction of non-resident individuals and resident individuals to RMB 5,000 ($734) a month. It is a levelled deduction for non-residential taxpayers, residents, and it increased the amount that gets deducted from taxpayers.
Previously, there was a standard deduction for residents of RMB 3,500 ($514) a month. It was RMB 4,800 ($705) for the non-residents.
Other additional deductions:
- Education expenses of children
- Expenses for continuing education
- Healthcare costs for critical illnesses
- Mortgage interest in housing
- Supporting the elderly expenses
- House rent
Filing Your Personal Income Tax
China’s taxation system provides that the employer is directly doing Income tax Reporting every month. The employer must withhold the monthly salary sum. Also, the employee should complete an annual tax report on their own. It is a complicated procedure, and it might be necessary to demand professional help for it.
Based on the regulation of self-reporting, a natural person should submit a yearly tax return when they meet these situations:
- Their annual income is RMB 120,000
- Has at least two sources of income
- Earn income from the sources outside the PRC
- The person has a taxable income without an employer or other withholding agent
The yearly tax should be reported aside from the declaration of monthly tax.
Foreigners Staying in China for a Year or More but Less Than Five
If the person has been in China for longer than 183 days, he or she is a China resident. The person is subject to taxation, but will most likely be considered as domiciled and not liable for China’s worldwide income taxation.
If the foreigner has been staying in China for at least five years, he or she is liable for the worldwide income and must include that in filing taxes.
It is the IIT for anyone who is thinking of doing business in China.