Key Developments in China’s New Legal Reforms

In January 2019, Chinese government has reframed its legal structure and brought in several changes. Remaining aware of the latest developments is a key issue for the foreign businesses finding for opportunities in China. The US government has urged China to change intellectual property law, end forced technology transfers from the US companies and stop cyber theft of the American trade secrets.

Washington accused Beijing of reneging on commitments to change its laws to enact economic reforms, while Beijing called U.S. President Donald Trump’s tariff’s “barbaric.” Leaders from both countries are now vowing a long fight, despite slowing domestic economies. Shi Yinhong, a prominent international relations scholar from Renmin University, said the gap between the two sides was widening as Washington demanded a strong enforcement mechanism while Beijing wanted more leeway.

In the current scenario, the US and the European companies with a business interest in China should closely follow the changes in the Chinese legal framework to ensure their business stays compliant in China.

Individual Income Tax (IIT) Reform

China’s IIT reform introduced a host of changes to the system of individual taxation in the country. In addition to the introduction of special additional deduction and the reform of the 5-year rule, it is also discussed how the taxable basis apportionment between China- and foreign-sourced income is defined.

The tax reform includes the following major changes:

  • Tax brackets and tax rates
  • Special additional deductions
  • Cumulative withholding tax method
  • New method for determining employee tax type
  • Tax income categories

China’s New E-Commerce Law

China’s comprehensive e-commerce law will bring heightened pressure on online retail companies to fight the sale of counterfeit and copycat merchandise on their platforms. Coverage of the E-commerce Law is very broad. According to Article 2, e-commerce refers to any operational activities that sell goods or provide services via information networks like the Internet. One important feature of the new law is the requirement that online businesses must register their business and acquire all necessary licenses regulating particular activities, such as the sale of therapeutic drugs.

IP Protection Regulations

Amendments to the Trademark Law come down heavily on trademark squatters and those found guilty of trademark infringement – key grievances repeatedly cited by foreign brands in China. On 23 April 2019 China passed amendments to two major IP laws -the Trademark Law and the Anti-Unfair Competition Law (AUCL). Specifically, the Trademark Law has been amended in order to tackle bad faith trademark filings without an intent to use by way of clarifying Article 4 of the law.

Key points of China’s IP protection law

  • Increasingly greater entanglement with the internet, data and competition
  • Enhances in the statutory measure of damages
  • Greater concurrence of the patent system with those extant Internationally, particularly in the medical field
  • Easier securing of preliminary and interlocutory

In order to reduce the risk of incompliance, foreign businesses operating in China should immediately comply with the new laws.

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Impact of China’s New IIT Law on Foreign Nationals

China Individual Income Tax 2019 made fundamental changes in the current tax region. Along with the Chinese taxpayers, foreign nationals will also feel the impact of China’s IIT reform. Under the new reform, foreigners who live and work in mainland China for prolonged periods will be required to pay tax on their worldwide income. The new IIT Law introduces the definitions of “resident” and “non-resident”. Under the new Law, individuals who are domiciled in mainland China, or non-domiciled and have resided in mainland China for 183 days or more within a calendar year, are considered as China tax residents and are subject to IIT on their worldwide income.

A threshold commonly adopted by many countries (such as the US, the UK, Australia, France and New Zealand), China Briefing, a business magazine for foreign investors in China, reported on their website. The new 183-day rule reduces the amount of time one has to spend in China to be considered a tax resident. The updated tax brackets and standard deductions stipulated in the new law took effect on October 1, 2018, while the remainder of the new provisions came into force from January 1, 2019.

Thus, while it is easier to become a Chinese tax resident under the new IIT rules, an expatriate working in China can still reduce their Chinese IIT liability by traveling outside China for more than 30 consecutive days in one calendar year every six years.

China’s IIT law so far allowed expats to deduct a certain portion of their tax for the following:

  • Healthcare costs (but only for serious illnesses)
  • Child education expenses
  • Further expenses self-education
  • Housing rent, and
  • Housing loan interest

 

The new IIT Law combines the following four existing categories of income into a new category of “comprehensive income”: salary and wages, income from providing services, author’s remuneration, and royalties. Under the new IIT law, the five-year period has been extended to six years. If the non-domiciled individual has not been a tax resident in any calendar year during a six-consecutive-year period, the individual will be exempt from Chinese IIT on income that is neither sourced in China nor paid by a Chinese enterprise or individual.

Final Thoughts

The adjustment marked more generous tax exemptions on overseas-sourced incomes of foreigners and non-mainland citizens working in the mainland. The move will attract more foreign investment and overseas talent to work in the mainland.

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