To implement the amended Individual Income Tax Law of the People’s Republic of China (the “Tax Law”) and the Regulations on the Implementation of the Individual Income Tax Law of the People’s Republic of China (the “Implementation Regulations”), the Ministry of Finance and the State Administration of Taxation recently promulgated an announcement (the “Announcement”) to provide further explanations about the individual income tax policies for non-resident individuals and resident individuals who are not domiciled in China (collectively the “Non-domiciled Individuals”). The Announcement is highlighted below:
1. Regarding income sources
To address issues regarding source of income, the Announcement contains more specific provisions on the source of income for wages, bonuses, stock options, remuneration of directors, supervisors and senior executives, and author compensation. If an individual’s wages earned during his work in China shall be considered domestic income, and the source for both bonuses and stock option income also determined based on such principle. However, for directors, supervisors or senior executives of a domestic resident enterprise (the “Senior Executives”), their wages or remuneration (which includes bonuses and stock options) paid or assumed by the domestic resident enterprise are all considered domestic income regardless of where they performed their duties. In addition, author compensation paid or assumed by domestic enterprises, business organizations or other entities shall be considered domestic income.
2. Calculation of wage income for Non-domiciled Individuals
With respect to the calculation of wage income for Non-domiciled Individuals, whether the Non-domiciled Individuals are residents or non-residents shall be considered first. In case of non-residents, the calculation shall be based on whether the stay does not exceed 90 days or is longer than 90 days but shorter than 183 days. In case of resident individuals, it would be whether they have stayed for more than a cumulative 183 days in a given year for more than six consecutive years. The above calculation rule also applies to non-resident individuals who are the Senior Executives.
3. Calculation of taxes forNon-domiciled Individuals
For income from bonuses and stock options as received by a Non-domiciled Individual in one month, that amount need not be combined with wage income, and it may be amortized over six months for taxation without deducting the expenses. The monthly tax rate table applies to the calculation of the tax to be paid. If the bonuses are for several months, such tax calculation method may only apply to each non-resident individual once in one calendar year.
4. Application of tax agreements to Non-domiciled Individuals
According to the Announcement, for individuals that may be taxed by the other jurisdiction as defined under the double taxation avoidance agreements signed by the state and the arrangements for avoiding double taxation between the Mainland, Hong Kong and Macao (the “Tax Agreements”), they are entitled to certain treatments under the Tax Agreements pursuant to those Tax Agreements and the relevant provisions of the Ministry of Finance and the State Administration of Taxation, or they may choose not to apply those treatments.
In particular, for royalty income, author compensation or labor remuneration income, if the Non-domiciled Individuals may be taxed by the other jurisdiction, they may exclude the above three income categories from taxable income if those amounts are eligible for the royalty or technical service fee treatments in the Tax Agreements, and the payable tax amount should be calculated for the month in which the income is generated pursuant to the taxable amount and tax rate under the Tax Agreements, with the tax prepaid or withheld in advance. When the annual settlement is made, the income under the aforementioned royalty or the technical service fee treatment does not have to be included into the yearly income, and the tax to be paid plus any supplements or refunds shall be separately assessed pursuant to the taxable amount and tax rate under the Tax Agreements.
5. Relevant tax collection requirements for Non-domiciled Individuals
As to the expected length of domestic stay by Non-domiciled Individuals, the Announcement provides that when a Non-domiciled Individual files taxes for the first time in a tax year, the tax to be paid shall be calculated based on the contractual obligations and other relevant circumstances to estimate the number of days of stay in China in a tax year, as well as the number of days stayed in China pursuant to the period stipulated under the Tax Agreement. If the actual circumstances are different from estimates, further settlement and payment may be made with an application for tax refund or supplemental tax payment.
Under circumstances where the domestic employer of the Non-domiciled Individual reports that related parties overseas are paying the Non-domiciled Individual’s wages, the Announcement provides that if the domestic employer and the overseas entities or individuals are affiliated, the Non-domiciled Individual may file and pay taxes on his own, or he may request his domestic employer to pay the taxes on his behalf for the part or the entirety of the wage income which that is being paid by the affiliated entities/individuals overseas. If the Non-domiciled Individual does not request his domestic employer to pay his taxes, the domestic employer shall report such to the tax agency within 15 days after the end of the month in which relevant income is paid, including information such as the work arrangements, overseas payment status and contact method for the Non-domiciled Individual.
Although the Announcement was promulgated on March 14, 2019, the effective date of the Announcement is retroactive to January 1, 2019. Therefore, if the Non-domiciled Individual paid extra taxes for income received after January 1, 2019 pursuant to the previous requirements, he may apply for a tax refund. Meanwhile, 14 previous documents relating to taxation of Non-domiciled Individuals are abolished as a result.