Individual Income Tax in China

IIT is imposed on all individuals, including Chinese and foreign nationals, residing in or deriving income from China.

Contributing Advisor

Sandy Zhang

Senior Manager, Human Resources

The comprehensive income is subject to three to 45 percent of progressive rates on a whole.

It’s the employer’s responsibility to accurately calculate and withhold individual income tax (IIT) on employment income, including but not limited to wages and salaries, bonuses, stock options, and allowances, before paying a net amount to its employee.

This section covers the fundamentals of individual taxation that’s imperative for all employers to know before setting up a business.

Taxable income

Under the IIT Law, the following income of an individual shall be subject to IIT:

• Income from wages and salaries;
• Income from remuneration for independent services (20 percent of the income is regarded as deductible expenses);
• Income from author’s remuneration (20 percent of the income is regarded as deductible expenses, and a further 30 percent discount is available when computing the taxable income);
• Income from royalties (20 percent of the income is regarded as deductible expenses);
• Income from business operation;
• Income from interest, dividends and bonuses;
• Income from lease of property;
• Income from transfer of property; and
• Contingent income.

For resident taxpayers, the first four types of income are consolidated into a new category - comprehensive income and are subject to yearly computation (but employers are still required to compute and withhold the IIT on a monthly basis).

The taxable income amount of comprehensive income of a resident individual shall be the balance after deduction of the standard deduction (RMB 60,000 per year, approx. US$8,500), as well as special deductions, special additional deductions and other deductions determined pursuant to the law, from the income amount of each tax year.

For non-resident taxpayers, the first four types of income are computed separately per time or per month when it occurs. The taxable income amount for income from wages and salaries of a non-resident individual shall be the balance after deduction of the standard deduction (RMB 5,000 per month, approx. US$710), as well as other applicable deductions. The IIT rates for non-resident taxpayers are generally equal to those for resident taxpayers.

Taxpayers and tax liability

To calculate IIT for an employee, the employer must decide whether an employee is liable for IIT.

The IIT Law divides IIT taxpayers into two categories: resident taxpayer and non-resident taxpayer.

Domestic employees and foreign employees who stayed or are expected to stay in China for at least 183 days are regarded as resident taxpayers, while expatriates who come to China for short-term (less than 183 days) work, such as commercial performance and training, are regarded as non-resident taxpayers.

Resident taxpayers and non-resident taxpayers have different tax liabilities to their income, as summarized below:

Six-year rule

Individuals who do not have a domicile in China will not be required to pay IIT on their worldwide income until they have lived in China for 183 days or more in a year for more than six years in a row. The six-year rule began on January 1, 2019. The number of years before 2019 won’t be included into the count of the six-year, and individuals who have no domicile in China won’t be subject to worldwide income before the year of 2024.

The six-year count can be reset by living in China for less than 183 days in a tax year, or by leaving China for more than 30 days in a row where their days of residence in China have reached 183 days in a tax year.

Income sourced in China

The following income shall be deemed income sourced in China, regardless if the place of payment is in China or not:

• Income derived from independent services provided in China due to tenure of office, employment, performance of contract, etc.;
• Income derived from lease of property to a lessee for use in China;
• Income derived from licensing of various licensing rights for use in China;
• Income derived from transfer of properties such as immovable property in China or transfer of other properties in China; and
• Income from interest, dividends and bonuses derived from enterprises, institutions, other organizations and resident individuals in China.

As to employment relationship, income sourced in China is defined by 'salary and wages that are related to the individual’s working period in China'.

Under the IIT Law, working period is counted in days, which includes actual working days, public holidays, annual leaves, as well as training days occurred inside and outside of China during the individual’s China working period.

A day in which a non-domicile person stays in China for less than 24 hours will be counted as 0.5 day when calculating their working period in China. This applies to non-domicile people who are employed by domestic and foreign employers simultaneously, or who are employed by foreign employers only, but provide work in China and abroad at the same time.

The actual-work-time rule does not apply if the individual holds a senior management position in domestic enterprises in China. Their director’s fees, supervisor’s fees, wages and salaries, and other similar income such as bonuses and stock options paid by the domestic enterprise, shall be regarded as income sourced from China, regardless of whether they actually work in China or not.

Tax exempt income

Under the  IIT Law, the following types of individual income shall be exempted from individual income tax:

• Awards for achievements in science, education, technology, culture, public health, sports, environmental protection, etc. granted by the provincial people’s governments, ministries and commissions under the State Council, units of the Chinese People’s Liberation Army at or above corps level, as well as foreign organizations and international organizations;
• Interest income on treasury bonds and other financial debentures issued by the state;
• Subsidies and allowances issued on a unified basis in accordance with the provisions of the state;
• Welfare benefits, compensation, and relief funds;
• Insurance claims;
• Military severance payment, demobilization pay, and decommissioning pay received by members of the armed forces;
• Settling-in allowance, severance pay, basic pension or retirement pay, retirement allowances, and subsidies given to public servants and workers on a unified basis in accordance with the provisions of the state;
• Income derived by diplomatic representatives, consular officers, and other personnel of embassies and consulates in China, which are exempted from tax in accordance with the provisions of the relevant laws of China;
• Tax-exempt income stipulated in international conventions and executed agreements to which the Chinese Government is a party; and
• Other tax-exempt income stipulated by the State Council.

Deductions

The IIT Law allows several deductions, like, standard deductions, special deductions, special additional deductions, and other deductions determined pursuant to the law, to be deducted from the wage and salaries when calculating the taxable income.

Standard deductions

Standard deduction refers to a fixed amount of money that can be deducted from the individual’s taxable income, which equals to the government’s evaluation of the basic living expenses of the individuals.

The standard deductions for all taxpayers (domestic and foreign employees) are unified to RMB 5,000 per month.

Special deductions

Special deductions refer to the basic social insurance premiums and housing fund contributed by the employee in accordance with the scope and standard stipulated by the laws and regulations.

Each region has their stipulated basic contribution rates. Contribution beyond that might not be pre-tax deductible. For example, although employees are allowed to make additional contributions to the housing fund, it’s not pre-tax deductible for the part over 12 percent of their salary.

Special additional deductions

The IIT system introduced ‘special additional deductions for specific expenditures’ (hereinafter, special additional deductions), which includes:

Tax-exempt fringe benefits for foreigners

The Chinese tax bureau currently allows foreign employees to deduct certain fringe benefits before levying the tax on their monthly salary. It’s common practices that companies structure part of their foreign employee’s salary as fringe benefits.

Generally, the below allowances are deductible:

• Housing expense;
• Meal fee;
• Laundry fee;
• Education expense for children;
• Language training expense;
• Relocation expense;
• Business travel expense; and
• Home visit expense.

Not all companies are eligible to use these allowances to help their foreign employee save tax. This is because the tax bureau has certain discretion to reject the tax-exempt applications where the employer has in-compliant tax records. Companies are suggested to consult with the tax bureau in charge in advance.

To attract and retain foreign talent, the Ministry of Commerce and the State Taxation Administration jointly extended China’s preferential IIT policy on foreigners' fringe benefits until December 31, 2023.

Other deductions determined pursuant to the law

The IIT Law allows certain other deductions, such as payment by an individual for enterprise annuity and occupational annuity which comply with state provisions, expenditure of an individual for purchase of commercial health insurance and tax-deferred commercial pension insurance which comply with State provisions, and other deductible items stipulated by the State Council.

IIT calculation

For resident individuals

When a company pays wages and salaries to an employee who is regarded as resident individual, it must compute the IIT amount using the ‘cumulative withholding method’, and withhold and report the IIT on a monthly basis.

Under the cumulative withholding method, the ‘IIT amount to be withheld for the current period’ should be the balance of the ‘cumulative IIT withholding amount until the current period’, with the ‘cumulative tax credit’ and the ‘cumulative IIT amount that has already been paid’.

To calculate the cumulative IIT withholding amount until the current period:

• Calculate the taxable income amount subject to cumulative withholding by deducting various items – including the cumulative tax-exempt income, the cumulative standard deductions, the cumulative special deductions, the cumulative special additional deductions, and cumulative other deductions determined pursuant to the law – from the taxpayer’s cumulative income from wages and salaries for the tax year derived from employment up to the current month; and
• Apply the applicable withholding rates and quick deductions stipulated in the IIT Withholding Rates Table for Resident Individuals.

Where the IIT amount to be withheld is a negative value, a tax refund will not be made in the interim. Where the balance amount at end of the tax year is still a negative value, the taxpayer will, through completing annual tax reconciliation for consolidated income, obtain a tax refund for excess tax paid and make retrospective payment if there is under-paid tax.

For non-resident individuals

When a company pays wages and salaries to a non-resident individual, it is required to withhold and report IIT on a monthly basis, or for each payment, in accordance with the following methods:

• Calculate the taxable income amount by lessening standard deduction (RMB 5,000) and other deductions – special additional deductions (where it is applicable), tax-exempt fringe benefits (where it is applicable) – from the non-resident taxpayers’ monthly income amount liable to Chinese IIT;
• Apply the applicable tax rates and quick deductions stipulated in the IIT Withholding Rates Table for Non-resident Individuals.

Annual reconciliation

Resident taxpayers are required to make a settlement during the period between March 1 and June 30 the following year.

This mechanism applies specifically to the following scenarios:

• Taxpayers deriving comprehensive income from two or more sources, and the balance after deducting special deductions from the amount of annual comprehensive income exceeds RMB 60,000;
• Taxpayers deriving one or more items of comprehensive income from labor services, author’s remuneration or royalties, and the balance after deducting special deductions from the amount of annual comprehensive income exceeds RMB 60,000;
• Taxpayers deriving comprehensive income, and the total tax paid in monthly IIT filings within a tax year is less than the tax payable amount; and
• Taxpayers deriving comprehensive income, and can apply for a tax refund.

IIT declaration and filing

IIT declaration

Taxpayers are required to make an IIT declaration upon emigration.

We have detailed the circumstances under which taxpayers need to make a tax declaration below:

• Taxpayer obtains taxable income but there is no withholding agent;
• Non-resident individual derives income from wages and salaries from two or more sources in China;
• Taxpayer obtains comprehensive income and needs to process annual tax reconciliation;
• Taxpayer obtains taxable income but the withholding agent does not withhold tax;
• Taxpayer obtains overseas income;
• Taxpayer has migrated overseas and cancelled his/her household registration in China; or
• Any other circumstances stipulated by the State Council.

IIT filing

The employer is required to make IIT filing within the first 15 days of the month following the tax withholding either through IIT system online or submit a Filing Form for Individual Income Tax Withholding to the Tax Bureau in charge.

When the employer pays income to a taxpayer for the first time, it shall complete an Individual Income Tax Basic Information Sheet (Form A) based on basic information such as tax ID provided by the taxpayer and submit it to the tax authorities at the time of tax filing in the following month.

Preferential IIT policies in special regions

To lower the IIT rate and offset the difference with Hong Kong, nine mainland GBA cities have introduced IIT subsidies from 2019 to 2023. During this period, the portion of the IIT that exceeds 15 percent of the taxable income paid of the qualified overseas talent will be refunded as fiscal subsidies.