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.
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.