LawFlash

Amended PRC Individual Income Tax Law and Regulations Impact Expatriate Employees in China

January 25, 2019

The Amended Individual Income Tax Law has implications for both Chinese nationals and expatriates working in the People’s Republic of China. Notably, tax residency, and its accompanying individual income tax liability, will be more easily triggered as expatriates will be considered tax residents if they reside in China for 183 days or more in a calendar year. For an interim period, however, expatriates can choose between the previous suite of tax-deductible benefits or a uniform set of deductible expenses that also applies to Chinese nationals and will be the new system going forward.

The Amended Individual Income Tax Law, as well as a suite of complementary regulations and notices (collectively, the New IIT Law), came into effect in the People’s Republic of China (PRC) on January 1, 2019. The amendments are far reaching for both Chinese nationals and expatriates, which under the tax laws include all non-PRC nationals, including Taiwanese, Hong Kong, and Macau passport holders, working in the PRC. The changes will have an impact on expatriate employees and their individual income tax (IIT) liabilities.

Definition of Tax Resident

The New IIT Law changes the individual tax residence rule from the former one-year test to a 183-day test, which will likely trigger “tax residency” and accompanying IIT liability in China more quickly and easily.

 

Before January 1, 2019

After January 1, 2019

Tax Resident

  • - Has a domicile in China or
  • - Does not have a domicile but has resided in China for one year without any single departure from China for more than 30 days or cumulative departures of more than 90 days
  • - Has a domicile in China or
  • - Does not have a domicile in China but has resided in China for 183 days or more in the tax year (which is the calendar year)

Tax residents are taxed on their worldwide income.

Non–Tax Resident

  • - Has no domicile in China and does not reside in China or
  • - Has resided in China for less than one year
  • - Has no domicile in China and does not reside in China or
  • - Has resided in China for less than 183 days

Non–tax residents are taxed only on their China-sourced income.

 

IIT Threshold for Expatriates

Under the New IIT Law, the threshold income before expatriate employees are liable to pay IIT increased from CNY 4,800 (approximately US$706) to CNY 5,000 (approximately US$736).

Tax-Deductible Benefits for Expatriates

The New IIT Law provides a uniform set of tax-deductible expenses that are applicable to all taxpayers—Chinese nationals and expatriates alike.

However, the New IIT Law provides for a three-year interim period—from January 1, 2019, through December 31, 2021—during which expatriates can opt for either the currently available suite of tax-deductible benefits or the uniform set of tax-deductible expenses under the New IIT Law in a tax year. Starting from January 1, 2022, the current suite of tax-deductible benefits that apply only to expatriates will no longer be available, and expatriates can then use only the uniform set of tax-deductible expenses set forth under the New IIT Law. Once a choice is made in a given tax year, however, the expatriate’s preference for the former or new tax deduction regime cannot be changed again within that tax year.

Given that tax residents in the PRC now face liability for IIT on worldwide income, employers should anticipate some difficulty in attracting expatriate talent to the PRC or having expatriates remain in the PRC for more than 183 days per calendar year. That said, the New IIT Law does continue to provide some relief in this respect. Under the prior tax regime’s “Five Year Rule,” expatriates who were PRC tax residents could exit the PRC at least once every five years for at least 31 consecutive days, or 90 days in the aggregate, in a calendar year in order to be exempt from taxation on their non–PRC sourced income. Under the New IIT Law, expatriates who are PRC tax residents may exit the PRC at least once every six years for at least 31 consecutive days in a calendar year in order to be exempt from taxation on their non–PRC sourced income.

Tax-Deductible Expenses Under the New IIT Law

Item

Scope

Amount of Deduction

Children’s Education

From 3-year-old children (preschool) to Ph.D. graduation

CNY 1,000 (≈US$147) per month per child

Continuing Education

General continuing education

CNY 400 (≈US$59) per month during education

Professional continuing education

CNY 3,600 (≈US$530) per year when obtaining certificate

Treatment for serious illness

Self-paid portion of medical expenses that exceeds CNY 15,000 (≈US$2,207)

Actual expenses up to CNY 80,000 (≈US$11,770)

Home loan interest

Interest on first-time housing fund mortgage loan or commercial mortgage loan

CNY 1,000 (≈US$147) per month, up to 240 months

Housing rent

Rent payment (for non-homeowners)

CNY 800 (≈US$118), CNY 1,100 (≈US$162), or CNY 1,500 (≈US$221), depending on the city in which the expatriate works

Care for the elderly

Caring for parents who are at least 60 years old

CNY 2,000 (≈US$294) for single child, or maximum CNY 1,000 (≈US$147) for each sibling depending on apportionment among siblings

 

Steps for Companies to Take

In the light of these sweeping changes under the New IIT Law, employers should reassess their current benefits policies with respect to expatriate employees who are seconded to the PRC or hired locally in the PRC to ensure that they are continuing to offer tax-efficient and legally compliant compensation and benefits policies.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Beijing/Shanghai
K. Lesli Ligorner
Todd Liao
Helen Tang