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IIT SERIES 4 – TRANSITIONAL TREATMENT OF PREFERENTIAL INDIVIDUAL INCOME TAX POLICIES


4 June 2020 | Human Resources, IIT | Written by Dr. Richard van Ostende | Reading time: 6 minutes


INTRODUCTION
The implementation of the new Individual Income Tax law resulted in a comprehensive review of existing tax policies, including policies on preferential tax treatment. As the new law includes provisions on topics which in the past were addressed in preferential policies, China’s State Administration of Taxation and Ministry of Finance jointly issued the Notice Regarding of Transitional Treatment of IIT Preferential Policy after the Revision of the IIT Law To clarify the transitional treatment of these preferential policies. In this article the impact of the transitional treatment of preferential individual income tax policies is discussed.

TRANSITIONAL ARRANGEMENTS
For the following topics of Annual one-time bonus, Income from equity incentives of listed companies and Non-taxable allowances and specific additional deductions for foreign individuals transitional arrangements have been made under the new IIT law, whereas for the topic One-time compensation for termination of labor relationships and early retirement a processing method has been defined.

Annual one-time bonus
During the transition period between 1 January 2019 and 31 December 2021, resident individuals have the possibility to decide whether to include received annual one-time bonuses into their comprehensive income for tax calculation purposes, or when qualified calculate the IIT separately based on the calculation method provided in Guo Shui Fa [2005] No. 9, explained below. Per 1 January 2022 the annual one-time bonus shall be included in the comprehensive income for income tax calculation.

When determining how to calculate the IIT liability the taxpayer should assess their comprehensive income, basic deductions, specific deductions, special additional deductions, and other deductions which have been discussed in our previous article, as well as non-taxable allowances and specific additional deductions for foreign individuals (in the event the tax resident is a foreigner) discussed later in this article, and determine which of the options is more favorable.

Resident individuals are individuals having a residence in China or having no residence in China and having resided in China for a total of 183 days in a tax year (which follows the Gregorian calendar from 1 January to 31 December).

Under Notice Guo Shui Fa [2005] No. 9, the taxation of qualified bonuses is calculated as follows. First the amount of the annual one-time bonus is divided by twelve to determine the monthly bonus amount. Based on the monthly comprehensive IIT table listed below the applicable tax rate and quick deduction is confirmed.

Tax payable = one-year bonus income / 12 months × applicable tax rate -/- quick calculation deduction


Income from equity incentives of listed companies

Following Announcement No. 164, equity incentives such as stock options, stock appreciation rights, restricted stocks, and equity incentives (hereinafter referred to as equity incentives) shall not become part of the comprehensive income during the transition period ending 31 December 2021. The equity incentive policy shall be clarified separately prior to 1 January 2022.

Under current regulation the comprehensive income tax rate table shall be applied in full to calculate the tax payment. Individual income tax applicable to equity incentives is calculated as follows:

Tax payable = equity incentive income × applicable tax rate -/- quick calculation deduction


One-time compensation for termination of labor relationships and early retirement

For processing one-time compensation for termination of labor relationships and early retirement no transitional period exists.


Termination of labor relationships

One-time compensation income due to the termination of the labor relationship between individuals and employers (including economic compensation, living subsidies and other subsidies issued by employers) are taxed as follows:

The income portion within the bandwidth of three times the average salary of the local employees in the previous year is exempted Personal income tax.

The income portion that exceeds three times the average salary of the local employees in the previous year will not incorporated into the current comprehensive income, but calculation of taxes will be made separately. The comprehensive income tax rate table is applied to the surplus amount separately to calculate the tax payable.


Early retirement

The one-time income obtained by an individual through early retirement procedures is taxed as follows: The income amount shall be evenly divided according to the actual annual number between the early retirement procedures and the legal retirement age, the applicable tax rate and quick calculation deduction shall be determined, and the comprehensive income tax rate table shall be applied separately.

Tax payable = {[(one-time subsidy income ÷ the actual annual number of years until early retirement procedures to the legal retirement age) -/- cost deduction standard] × applicable tax rate -/- quick calculation deduction} × early retirement procedures to the legal retirement age of actual years


Non-taxable allowances and specific additional deductions for foreign individuals

During the transitional period from 1 January 2019 to 31 December 2021, foreign individuals are considered resident individuals may choose to either enjoy special additional deductions for personal income tax, or may choose to follow certain policies which provide preferential tax exemption policies for housing subsidies, language training fees, and children ’s education fees.

Both treatments cannot be enjoyed at the same time. If one treatment has been selected, it cannot be changed within a tax year.

After the transitional period has ended, per 1 January 2022 foreign individuals will no longer be able to enjoy tax exemptions for housing subsidies, language training fees, children’s education fees. Foreign individuals will be able to enjoy special additional deductions as discussed in our article IIT Series 3 – Pre-tax deductions, special additional deductions, and other deductions.


SOURCES

  • State Administration of Taxation of the People’s Republic of China. (2018). Notice on the connection of preferential policies after the amendment of the personal income tax law (Cai Shui [2018] No. 164).

  • State Administration of Taxation of the People’s Republic of China. (1997). Notice of the State Administration of Taxation on the Implementation of Relevant Subsidies for Exemption of Individual Income Taxes for Foreign Individuals. (Guo Shui Fa [1997] No. 54).

  • State Administration of Taxation of the Ministry of Finance of the People’s Republic of China. Notice on Issues. (Cai Shui [1994] No. 20).

  • State Administration of Taxation. (2005). Notice of the State Administration of Taxation on Adjusting the Method of Calculating and Levying Individual Income Taxes on Annual One-off Bonuses, etc. Obtained by Individuals. (Guo Shui Fa [2005] No. 9)

  • State Administration of Taxation of the Ministry of Finance of the People’s Republic of China. (2004). The Notice on Individuals Obtaining and Exempting Individual Income Taxes for Housing and Subsidies in Hong Kong and Macao. (Cai Shui [2004] No. 29).

The information in this article is intended for general information on the subject matter. The content of this article is not intended to replace professional advice on the subject matter in relation to your specific circumstances.

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