Regulations on the Implementation of the Individual Income Tax Law (Mainland China)

Karl Zhang

The State Council recently released the corresponding amendments to the Implementation Regulations for the Individual Income Tax Law (the “Regulations”), which came into effect on January 1, 2019. The amendments also primarily reflect issues relating to tax reform.  Specifically, the Regulations include the following provisions:

1. The policies on tax exemption for foreign nationals are specified

Since the amendments to the Individual Income Tax Law changed the definition of residents and nonresidents to the standard of 183 days, the Regulations are also amended accordingly. Meanwhile, the Regulations point out that for individuals without a domicile in China, if their stays in China of at least 183 days are for less than six consecutive years, they are exempt from paying income taxon income originated from outside of China or paid by overseas organizations or individuals once they have made the recordation with the competent tax authority.  To wit, although individuals who have lived in China without a domicile for at least 183 days are defined as resident individuals and are required to pay taxes on their domestic and overseas income, according to the Regulations, as long as the years of those stays are less than six consecutive years and the above recordation procedure has been completed, they are not required to pay taxes on their income derived from overseas sources.  Meanwhile, the Regulations also provide that if there is any single departure from China for over 30 days in any year when the cumulative stay in China exceeds 183 days, the calculation of the aforementioned 183-day residence consecutive years will be restarted.

This will effectively ease the tax filing burden of foreign nationals in China, is more concise and clear, and is more favorable to the tax planning of foreign nationals wishing to avoid double taxation.

2. The level of the agency formulating taxation measures for “share transfer income” is raised

Pursuant to the original regulations, the measures for levying individual income taxes on “income from transfer of shares” are formulated separately by the Ministry of Finance and implemented upon approval of the State Council. After the amendments, however, the taxation measures may only be separately prescribed by the State of Council directly and submitted to the Standing Committee of the National People’s Congress for recordation.  This means that the taxation on the “income from transfer of shares” will be more stringent and more attention should be paid to this development.

3. The scope of other deductions is clarified

As the tax reform brought the concept of special deductions, special additional deductions and other deductions, the Regulations also provides explanations as to what is considered other deductions, which include corporate annuities that are compliant state requirements and paid by individuals, occupational annuities, personal purchase of commercial health insurance that are compliant with national requirements, tax deferred commercial endowment insurance, and other deductible items pursuant to the State Council’s requirements.

4. Clarification of settlement and payment scenarios

In view of the settlement and payment system proposed in the Individual Income Tax Law, the Regulations also provide a supplementary explanation. Pursuant to the Regulations, the scenarios where consolidated income needs to be settled and paid include: (1) where the consolidated income is derived from more than two sources, and the balance of the annual consolidated income minus the special deductions exceeds RMB 60,000; (2) where one or more items of income are derived from services, author’s remuneration or royalties with the balance of the annual consolidated income minus special deductions exceeding RMB 60,000; (3) where the amount of the prepaid tax in the tax year is lower than the taxable amount; and (4) where the taxpayer applies for a tax refund. If a taxpayer applies for a tax refund, it shall provide a bank account opened in China and apply for a tax refund at the place where the settlement and payment are made.

In general, the amendments to the Regulations primarily seek to reflect the tax reform and making the new law easier to operate. Meanwhile, the tax exemption policies for foreign nationals are also clarified, contributing to reduce income tax burden on foreign nationals and to attract foreign talents.