China Tax Update – Good News for Businesses, Mixed News for Expats
In 2018, China’s economy grew at the slowest pace in 28 years. So it’s no surprise that the government has pledged to help businesses weather the slowdown by reducing their tax burden. As we outline below, it’s already delivering on its promise through a new set of value-added tax (VAT) and corporate income tax (CIT) policies that will benefit many small to medium-sized enterprises (SMEs).
At the same time, the newly updated personal income tax law, intended primarily to cut taxes for low and middle-income earners, will have important implications for expat taxpayers. Read on for more details and get in touch with our tax advisors if you’re unsure about how these updates will affect you.
Business-Friendly Tax Reforms
On January 17th, 2019, the government announced a set of tax policies meant to ease the tax burden on SMEs, both domestic and foreign-invested (Circular No.13). The new policies, outlined below, will be applied on taxes paid from January 1st, 2019 to December 31st, 2021.
- Broader eligibility for value-added tax (VAT) exemption: Small-scale VAT taxpayers with monthly sales of less than RMB 100,000 will be exempt from VAT. The exemption threshold was previously RMB 30,000.
- Broader eligibility to preferential corporate income tax (CIT) rates: The definition of what counts as a small and low-profit enterprise has been broadened so that more businesses can enjoy preferential CIT rates. More than 95% of enterprises in China fit the new criteria.
- Lower preferential CIT rates: Businesses that are eligible for preferential CIT rates will enjoy even lower tax rates than before. The standard CIT rate in China is 25%. Previously, the preferential CIT rate was 10% for enterprises with an annual taxable income of up to RMB 1m. Now, eligible companies will pay only 5% CIT rate on their first RMB 1m of taxable income and 10% on the next RMB 2m.
Individual Income Tax (IIT) Updates
China’s new IIT law became fully effective on January 1st, 2019, although some changes were introduced as early as October 2018, including a higher standard deduction and lower tax rates for low and middle-income brackets.
However, details on how the new law would impact foreign taxpayers emerged slowly. The government has now released further guidelines to clarify the new law’s implications on expats. Here are the most important:
EXPATS’ TAXPAYER STATUS
- 183-day rule: Foreigners will be treated as tax residents if they stay in China for more than 183 days in one year (January to December), down from one whole year.
- Six-year rule: Foreigners who are tax residents for six consecutive years in China will have to pay Chinese taxes on their global incomes.
- 30-day rule: If a foreign tax resident exits China for more than 30 consecutive days in one year, their six-year period is reset. Previously, leaving China for 90 cumulative days in a year would also break the six-year period, but this option is no longer available.
- New “special deductions”: Previously, only expats enjoyed tax-deductible allowances. The new law outlines six deductions that apply for all tax residents: children’s education, continued education, major illness, rent, home loan interest, and elderly care.
- Bad news for expats?: Starting January 1st, 2022, foreign taxpayers will enjoy the same “special deductions” that apply to all residents, thus losing some of their current tax-free allowances, e.g., flights home, language training, and laundry fees. By that date, however, the government may well modify the six-item list.
- Transition period: Up until December 31st, 2021, foreign taxpayers can choose between the old allowances system or the newly-introduced “special deductions”, bearing in mind that they cannot change their choice within a given tax year.
TAX ON ANNUAL BONUSES
- Transition period: Until December 31st, 2021, annual bonuses will continue to be taxed as a separate income (i.e. annual bonus ÷ 12, then taxed according to the monthly taxable income brackets).
- Factored in: Starting January 1st, 2022, one-off year-end bonuses will be taxed as part of an individual’s annual taxable income. The way in which an employee’s salary package is distributed (fixed versus bonus) will no longer affect his/her overall tax liability.
CHANGES TO IIT CALCULATION AND FILING:
- New IIT calculation method: The IIT liability of resident taxpayers will be calculated based on a person’s annual consolidated income (salaries, service income, author’s remuneration, and royalties) rather than their monthly taxable income.
- New tax brackets: Income tax brackets were updated in a way that reduces the tax burden on low and middle income earners (effective since October 1st, 2018).
- Higher standard deduction: The standard deduction was raised to RMB 5,000 per month (or RMB 60,000 per year), up from RMB 3,500 for residents and RMB 4,800 for non-residents previously (also effective since October 1st, 2018).
- New tax filing method: Individuals can use the new IIT app to self-file for tax deductions or pass on the information to their employers for them to handle it on a monthly basis.
Individual taxpayers and companies should familiarise themselves with the implications of these tax reforms to take advantage of preferential updates, minimise the impact of unfavourable provisions, and ensure compliance. Get in touch with our Tax Advisory Team if you have doubts about how these tax updates will impact you.