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IIT SERIES 2 – TAXATION OF INCOME OF RESIDENT INDIVIDUALS


24 April 2020 | Human Resources, Comprehensive Income, Tax | Written by Dr. Richard van Ostende | Reading time: 12 minutes


INTRODUCTION

Per 1 January 2019 China’s amended Individual Income Tax Law, requiring individual residents required to annually calculate their final income tax payable and handle their annual settlement. 2020 marks the first-time taxpayers have to handle the annual settlement in accordance with the new law. Between 1 March and 30 June 2020 annual settlement must be performed for the period of 1 January to 31 December 2019.

This series of articles will support individual taxpayers and withholding agents to navigate the new IIT Law by that explaining the scope of the new IIT law, the implications for taxpayers and requirements that must be met. In this second article focus goes out to the taxation of income by resident individuals.


THE DEFINITION OF RESIDENT AND NON-RESIDENT INDIVIDUALS

Taxpayers in China for Individual Income Tax are divided into resident individuals and non-resident individuals, which have different judgment conditions and different tax obligations.

  • 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)

  • Non-resident individuals are individuals who have no residence and do not live in China or have no residence and live in China for less than 183 days within a tax year.


TAXATION OF RESIDENT INDIVIDUALS

Comprehensive income: Employment income

The comprehensive income of individual residents consists out of the sum of employment income, personal services income, manuscript income and royalty income combined.

Taxable income is the comprehensive income minus deduction of the standard basic deduction of RMB 60.000 and special deductions, special additional deductions and other deductions determined according to law.

        Taxable income = [(comprehensive income -/- RMB 60.000 -/- special deductions)


The formula for calculation to determine the amount of tax refundable or payable is as follows:

        Tax refundable or payable = [(comprehensive income -/- RMB 60.000 -/- special deductions) * applicable tax         rate -/- quick deductions] -/- prepaid provisional taxes


Special deductions

Special deductions applicable to the comprehensive income will be discussed in detail in article IIT Series 3.


Applicable tax rate -/- quick deductions

The tax payable over employment income is calculated in accordance progressive individual income tax table illustrated in Figure 1.


The individual income tax payable can be calculated via two methods. The tax payable can be calculated per tax bracket up to the total amount of the annual taxable income and it can be calculated directly calculated based on the annual taxable income against the highest tax rate applicable minus quick deduction. Both calculations are illustrated below.


Calculation method 1

Taxpayer has obtained an annual total income out of employment of RMB 260.000, and no deductible items.

        Taxable income = RMB 200.000 -/- RMB 60.000 = RMB 200.000

        Tax payable = (RMB 36.000 * 3%) + (RMB 108.000 * 10%) + (RMB 56.000 * 20%) = RMB 23.080.


Calculation method 2

Taxpayer has obtained an annual total income out of employment of RMB 260.000, and no deductible items.

        Taxable income = RMB 200.000 -/- RMB 60.000 = RMB 200.000

        Tax payable = [(200.000 * 20%) -/- RMB 16.920] = RMB 23.080.


Comprehensive income: Personal service income

The tax payable over employment income is calculated in accordance progressive individual income tax table illustrated in Figure 2.


The standard basic deduction for personal services income is 20% of the total personal service income amount.

  Taxable income = Personal service income -/- standard basic deduction


The formula for calculation to determine the amount of tax refundable or payable is as follows:

  Tax payable = [(Taxable income * (applicable tax rate -/- quick deductions) * prepaid provisional taxes)


Similar to employment income, the individual income tax payable for personal service income can be calculated via two methods. Both calculations are illustrated below.


Calculation method 1

Taxpayer has obtained an annual total personal service income of RMB 120.000, and no deductible items.

        Taxable income = RMB 120.000 -/- RMB 24.000 (20%) = RMB 94.000

Tax payable = (RMB 20.000 * 20%) + (RMB 30.000 * 30%) + (RMB 44.000 * 40%) = RMB 30.600.


Calculation method 2

Taxpayer has obtained an annual total income out of employment of RMB 260.000, and no deductible items.

        Taxable income = RMB 120.000 -/- RMB 24.000 (20%) = RMB 94.000

Tax payable = [(RMB 94.000 * 40%) -/- RMB 7.000] = RMB 30.600.


Comprehensive income: Author’s remuneration

The standard basic deduction for author’s remuneration is 70% of the income amount, and author’s remuneration is subject to a flat withholding rate of 20%.


Calculation

Taxpayer has obtained an annual total author’s remuneration of RMB 100.000, and no deductible items.

The formula for calculation to determine the amount of tax payable is as follows:

  Taxable payable = [(Author remuneration income -/- standard basic deduction) * applicable tax rate]

        Tax payable = [(RMB 100.000 -/- RMB 70.000) * 20%] = RMB 6.000.


Comprehensive income: Royalties

The standard basic deduction for royalties is 20% of the income amount, and author’s remuneration is subject to a flat withholding rate of 20%.

The formula for calculation to determine the amount of tax payable is as follows:

  Taxable payable = [(Author remuneration income -/- standard basic deduction) * applicable tax rate]


Calculation

Taxpayer has obtained an annual total author’s remuneration of RMB 100.000, and no deductible items.

  Tax payable = [(RMB 100.000 -/- RMB 20.000) * 20%] = RMB 16.000.


Income out of Interest, dividend, and bonuses

The income out of interest, dividends, and bonuses shall be the amount of taxable income, as no standard basic deductions apply. For income out of interest, dividends, and bonuses a flat withholding rate of 20% applies.

The formula for calculation to determine the amount of tax payable is as follows:

  Taxable income = Income out of Interest, dividend, and bonuses

Tax payable = (Taxable income * applicable tax rate)


Calculation

Taxpayer has obtained an annual income out of Interest, dividend, and bonuses of RMB 100.000, and no deductible items.

        Tax payable = RMB 100.000 -/- (RMB 100.000 * 20%) = RMB 80.000.


Income out of property transfer

The income from the transfer of property shall be the amount of taxable income based on the balance of the income of the transferred property minus the original value of the property and reasonable expenses. For the taxable income, a flat withholding rate of 20% applies.


Income out of property rental

For income out of the lease of property taxable income is confirmed as follows

  • In the event the income amount does not exceed RMB 4.000 per installment, taxable income equals the income amount minus a standard deduction fee of RMB 800;

  • When the income amount exceeds RMB 4.000 per installment, taxable income equals the income amount minus a fee of 20% of the income amount.


The formula for calculation to determine the amount of tax payable is as follows:

        Income amount ≤ RMB 4.000

        Tax payable = Income amount -/- Fee RMB 800

        Income amount > RMB 4.000

        Tax payable = Income amount -/- (Invoice amount * 20%)


Income out of business operations

Income out of business operations consists out of income earned by resident individuals holding privately-owned businesses, sole proprietorship enterprises or partnerships. Such is subject to IIT at progressive income tax rates illustrated in Figure 3.



The income from business operations shall be the taxable income based on the total income of each tax year minus costs, expenses, and losses.

The formula for calculation to determine the amount of tax payable is as follows:

        Taxable payable = [(Business operations income -/- cost -/- expenses -/- losses) * applicable tax rate


TAXATION OF FOREIGN INDIVIDUALS’ WORLDWIDE INCOME: CONFIRMING TAX RESIDENCY STATUS FIVE-YEAR RULE EXTENDED TO SIX-YEAR RULE

Under the old regulations, if a foreign individual resided in China for five consecutive years the worldwide income would be subject to individual income taxation in China. Under the amended Individual Income Tax Law, this term has been extended to six years. Since 2019, foreign individuals who reside in China for 183 days or more per year for over six consecutive years will be subject to Individual Income Tax on their worldwide income starting the seventh consecutive year when they reside in China for 183 days or more during the year.

The number of tax days in China is calculated based on the number of days the foreign individual stays in China. Those staying in China for 24 hours or more are counted as days of residence in China, and those staying in China for less than 24 hours are not counted as days of residence in China.

Taxation of the worldwide income in China can be postponed or avoided. If a foreign individual makes a single departure outside of Mainland China of more than 30 consecutive days at any point during the six years, the duration of stay in China to count tax residency would be reset, postponing the date for the world income to be taxable in China.

Calculation of the years included in the six-year rule will start from 1 January 2019. The number of years spent in China before 2019 will not be included in the calculation.


SOURCES

  • National People’s Congress. (2018). Personal Income Tax Law of the People’s Republic of China. (Adopted at the fifth meeting of the Standing Committee of the Thirteenth National People's Congress on August 31, 2018).

  • State Administration of Taxation. (2018). Announcement on Transitional Matters on Comprehensively Implementing the Individual Income Tax Law. SAT Announcement [2018] No. 56.

  • Ministry of Finance and State Administration of Taxation. (2019). Announcement Regarding Criteria for Determining Days of Residing in China for Non-China domiciled Individuals. Announcement [2019] No. 34.

  • Ministry of Finance and State Administration of Taxation. (2019). Announcement Regarding the IIT Policies for Non-Residents and Residents without a Domicile in China. Announcement [2019] No. 35.


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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