China’s Individual Income Tax (IIT) law stipulates that all individuals who are working and earning income within the country are subject to the legislation. While Chinese nationals are taxed on both domestic and overseas earnings, foreigners are only taxed on income that they earn within China.
Taxation on salaries is set at progressive rates, while other types of income are subject to more variable rates depending on their nature. Though an employer’s payroll team usually files IIT on behalf of individual employees, both parties need to be aware of tax thresholds and plan effectively in order to reduce the tax liability.
Staff members are also required to make an annual declaration before the end of each financial year. Here we provide a general overview of how IIT works in relation to foreign nationals working in China: Taxable income for expatriates Calculating IIT liability is based on the source of income, how long the individual has worked in China, and whether or not income is earned within or outside of the country.
Taxable Income of Foreign Individual |
|
Taxpayer status |
Taxable Income |
|
Living in China ≤ 90 days(183 days if there is a tax treaty in place) |
-Income sourced within China -Income paid by overseas employer (not borne by its Chinese operation) is exempt |
|
Living in China > 90 days(183 days if there is a tax treaty) but less than one year |
-Income sourced within China -Income sourced outside of China is not subject to IIT, unless the taxpayer is a direct or senior manager of a Chinese domestic enterprise |
|
Living in China between one and five years |
-Income sourced within China -Income sourced outside of China paid by a Chinese enterprise or individual |
|
Living in China ≥ five years |
-Income sourced within China -Income sourced within and outside China from the sixth year onwards for every full year spent in China |
Whether or not income is earned inside or outside of China is determined by how long someone has actually worked in the country. Regardless of where payment is actually made, the following income types are considered China-sourced income:
- Providing services in the country;
- Leasing property to a lessee for use in China;
- Transferring property such as buildings and land-use rights within the country;
- Licensing the use of proprietary rights in China; and
- Interest, dividend and bonus income derived from companies, enterprises and other organisations or individuals in the country.
To understand tax liability, including scenarios that assess ‘time in China’ calculations, in more depth, read this article.
Salary
Salaries are defined as any income that is received from employment, including bonuses and stock options. Under IIT, tax is set at progressive rates ranging from 3% to 45%. Employers usually withhold income tax from wages and pay it to the tax authorities on a monthly basis.
The basic formula for calculating monthly IIT liabilities is as follows:
Monthly taxable income x applicable tax rate – quick deduction = monthly tax payable.
Monthly taxable income is calculated after a standard deduction of RMB 4,800 (US$719) is made for foreign nationals, including residents of Hong Kong, Macau, and Taiwan.
Contributions to Chinese social insurance as well as to other employment benefits will also be added to the pre-tax deduction as long as certain requirements are met and the relevant fapiao are provided. These employment benefits include:
- Allowances for housing, meals, relocation and laundry expenses;
- Relocation expenses upon commencement or cessation of employment in China;
- Reasonable business travel expenses and two personal trips to the individual’s country of origin; and
- Reasonable allowances for language training and children’s education.
It is not obligatory for employers to provide such allowances, but the situation should be discussed with employees. As benefits paid in cash may be subject to IIT, reimbursement may prove an effective alternative in order to reduce their tax bill.
Annual bonuses
Many companies in China offer their staff annual bonuses at the end of the year, for which IIT is calculated as follows:
IIT on lump sum – annual bonus = (lump sum annual bonus x monthly IIT rate applicable to 1/12 of lump sum annual bonus) – corresponding monthly quick deduction.
Employment Income Tax Rates and Deductions |
||
Monthly taxable income (RMB) |
Tax Rate |
Quick deducation (RMB) |
|
1,500 or less |
3% |
0 |
|
1,500<TI ≤ 4,500 |
10% |
105 |
|
4,500< TI≤ 9000 |
20% |
555 |
|
9000<TI ≤ 35,000 |
25% |
1,005 |
|
35,000< TI≤ 55,000 |
30% |
2,755 |
|
55,000< TI≤ 80,000 |
35% |
5,505 |
|
>80,000 |
45% |
13,505 |
To determine the applicable IIT rate for the bonus, it is necessary to divide the lump sum annual bonus by 12 to find the corresponding tax rate, as shown in the table below. Annual bonuses are often a major factor in influencing whether employees take on a new job or not. But including an annual bonus in taxable income can have a significant impact on tax liability.
Stocks, restricted stock units and equity bonds
Stock options, restricted stock units and equity incentives are all forms of compensation that are offered by employers to staff members as company stocks and shares. They are generally given to employees over a set time period in line with a planned schedule, which is usually based on performance or time-based milestones.
According to stocks and bonds legislation, IIT applies to income derived from these kinds of shares and units only on the date they are obtained or ‘activated’ rather than from the date they were granted.
Careful salary planning may enable employees to take home a bigger chunk by staying within applicable tax rate thresholds. This is because minimal salary increases can push taxable income over the threshold, which would significantly affect IIT liability.
IIT Calculation for Annual Bonuses |
||||
Annual Bonus Amount |
Tax Rate applicable |
Annual bonus amount (RMB) |
Tax Rate |
Difference in IIT amount (RMB) |
|
18,000 (i.e. 1,500*12) |
3% |
18,001 (i.e 1,500.08*12) |
10% |
1,155.10 |
|
54,000 (i.e. 4,500*12) |
10% |
54,001 (i.e. 4,500.08*12) |
20% |
4,950.20 |
|
108,000 (i.e.9,000*12)
|
20% |
108,001 (i.e.9,000.08*12) |
25% |
4,950.25
|
|
420,000 (i.e. 35,000*12) |
25% |
420,001 (i.e. 35,000.08*12) |
30% |
19,250.30 |
|
660,000 (i.e. 55,000*12)
|
30% |
660,001 (i.e. 55,000.08*12) |
35% |
30,250.35
|
|
960,000 (i.e. 80,000*12) |
35% |
660,001 (i.e. 55,000.08*12) |
45% |
88,000.45 |
Payment and declaration
Although employers usually withhold IIT automatically from salaries and pay it to tax authorities on a monthly basis, an annual IIT declaration should also be submitted within three months of the end of the previous calendar year. This activity should take place between 1 January and 31 March of the previous calendar year for taxpayers who meet at least one of the following five conditions – they must:
- Have an employment and non-employment-related annual income of more than RMB 120,000 (US$17,966);
- Obtain income from two or more sources within China;
- Earn income from outside of China – but only if they are resident or are non-residents who have lived and worked in the country for more than one year;
- Receive taxable income for which there is no withholding agent;
- Adhere to other conditions required by the State Council.
Individuals are required to submit their annual IIT declarations regardless of whether they have any IIT liabilities or not. A non-resident working in China for less than 12 months during the previous tax year is exempt from this requirement.
Anti-tax evasion efforts increase importance of compliance
The introduction of improved investigation methods over recent years have resulted in China’s tax authorities stepping up its anti-tax evasion activity in relation to foreigners. In Beijing, by screening zero tax declarations and singling out foreign enterprises with high profit margins and large numbers of foreign personnel, the Chaoyang Local Taxation Bureau was able to collect more than RMB 200,000 (US$29,943) worth of evaded IIT tax.
This means that employers and their expatriates should always seek to ensure that IIT is being paid in a correct and timely fashion and that they file annual declarations. In Beijing, Shanghai and other major cities, individuals can make their annual declarations online, using official WeChat social media accounts and mobile phone apps.
While ongoing efforts to improve the ease with which tax returns can be filed will go a long way towards improving compliance, it is no reason for either employers or expats to take their eye off the ball.
First published by China Briefing. Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters.
As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about the firm can be found at: www.dezshira.com.China’s Individual Income Tax (IIT) law stipulates that all individuals who are working and earning income within the country are subject to the legislation. While Chinese nationals are taxed on both domestic and overseas earnings, foreigners are only taxed on income that they earn within China.
Taxation on salaries is set at progressive rates, while other types of income are subject to more variable rates depending on their nature. Though an employer’s payroll team usually files IIT on behalf of individual employees, both parties need to be aware of tax thresholds and plan effectively in order to reduce the tax liability.
Staff members are also required to make an annual declaration before the end of each financial year. Here we provide a general overview of how IIT works in relation to foreign nationals working in China: Taxable income for expatriates Calculating IIT liability is based on the source of income, how long the individual has worked in China, and whether or not income is earned within or outside of the country.
Taxable Income of Foreign Individual |
|
Taxpayer status |
Taxable Income |
|
Living in China ≤ 90 days(183 days if there is a tax treaty in place) |
-Income sourced within China -Income paid by overseas employer (not borne by its Chinese operation) is exempt |
|
Living in China > 90 days(183 days if there is a tax treaty) but less than one year |
-Income sourced within China -Income sourced outside of China is not subject to IIT, unless the taxpayer is a direct or senior manager of a Chinese domestic enterprise |
|
Living in China between one and five years |
-Income sourced within China -Income sourced outside of China paid by a Chinese enterprise or individual |
|
Living in China ≥ five years |
-Income sourced within China -Income sourced within and outside China from the sixth year onwards for every full year spent in China |
Whether or not income is earned inside or outside of China is determined by how long someone has actually worked in the country. Regardless of where payment is actually made, the following income types are considered China-sourced income:
- Providing services in the country;
- Leasing property to a lessee for use in China;
- Transferring property such as buildings and land-use rights within the country;
- Licensing the use of proprietary rights in China; and
- Interest, dividend and bonus income derived from companies, enterprises and other organisations or individuals in the country.
To understand tax liability, including scenarios that assess ‘time in China’ calculations, in more depth, read this article.
Salary
Salaries are defined as any income that is received from employment, including bonuses and stock options. Under IIT, tax is set at progressive rates ranging from 3% to 45%. Employers usually withhold income tax from wages and pay it to the tax authorities on a monthly basis.
The basic formula for calculating monthly IIT liabilities is as follows:
Monthly taxable income x applicable tax rate – quick deduction = monthly tax payable.
Monthly taxable income is calculated after a standard deduction of RMB 4,800 (US$719) is made for foreign nationals, including residents of Hong Kong, Macau, and Taiwan.
Contributions to Chinese social insurance as well as to other employment benefits will also be added to the pre-tax deduction as long as certain requirements are met and the relevant fapiao are provided. These employment benefits include:
- Allowances for housing, meals, relocation and laundry expenses;
- Relocation expenses upon commencement or cessation of employment in China;
- Reasonable business travel expenses and two personal trips to the individual’s country of origin; and
- Reasonable allowances for language training and children’s education.
It is not obligatory for employers to provide such allowances, but the situation should be discussed with employees. As benefits paid in cash may be subject to IIT, reimbursement may prove an effective alternative in order to reduce their tax bill.
Annual bonuses
Many companies in China offer their staff annual bonuses at the end of the year, for which IIT is calculated as follows:
IIT on lump sum – annual bonus = (lump sum annual bonus x monthly IIT rate applicable to 1/12 of lump sum annual bonus) – corresponding monthly quick deduction.
Employment Income Tax Rates and Deductions |
||
Monthly taxable income (RMB) |
Tax Rate |
Quick deducation (RMB) |
|
1,500 or less |
3% |
0 |
|
1,500<TI ≤ 4,500 |
10% |
105 |
|
4,500< TI≤ 9000 |
20% |
555 |
|
9000<TI ≤ 35,000 |
25% |
1,005 |
|
35,000< TI≤ 55,000 |
30% |
2,755 |
|
55,000< TI≤ 80,000 |
35% |
5,505 |
|
>80,000 |
45% |
13,505 |
To determine the applicable IIT rate for the bonus, it is necessary to divide the lump sum annual bonus by 12 to find the corresponding tax rate, as shown in the table below. Annual bonuses are often a major factor in influencing whether employees take on a new job or not. But including an annual bonus in taxable income can have a significant impact on tax liability.
Stocks, restricted stock units and equity bonds
Stock options, restricted stock units and equity incentives are all forms of compensation that are offered by employers to staff members as company stocks and shares. They are generally given to employees over a set time period in line with a planned schedule, which is usually based on performance or time-based milestones.
According to stocks and bonds legislation, IIT applies to income derived from these kinds of shares and units only on the date they are obtained or ‘activated’ rather than from the date they were granted.
Careful salary planning may enable employees to take home a bigger chunk by staying within applicable tax rate thresholds. This is because minimal salary increases can push taxable income over the threshold, which would significantly affect IIT liability.
IIT Calculation for Annual Bonuses |
||||
Annual Bonus Amount |
Tax Rate applicable |
Annual bonus amount (RMB) |
Tax Rate |
Difference in IIT amount (RMB) |
|
18,000 (i.e. 1,500*12) |
3% |
18,001 (i.e 1,500.08*12) |
10% |
1,155.10 |
|
54,000 (i.e. 4,500*12) |
10% |
54,001 (i.e. 4,500.08*12) |
20% |
4,950.20 |
|
108,000 (i.e.9,000*12)
|
20% |
108,001 (i.e.9,000.08*12) |
25% |
4,950.25
|
|
420,000 (i.e. 35,000*12) |
25% |
420,001 (i.e. 35,000.08*12) |
30% |
19,250.30 |
|
660,000 (i.e. 55,000*12)
|
30% |
660,001 (i.e. 55,000.08*12) |
35% |
30,250.35
|
|
960,000 (i.e. 80,000*12) |
35% |
660,001 (i.e. 55,000.08*12) |
45% |
88,000.45 |
Payment and declaration
Although employers usually withhold IIT automatically from salaries and pay it to tax authorities on a monthly basis, an annual IIT declaration should also be submitted within three months of the end of the previous calendar year. This activity should take place between 1 January and 31 March of the previous calendar year for taxpayers who meet at least one of the following five conditions – they must:
- Have an employment and non-employment-related annual income of more than RMB 120,000 (US$17,966);
- Obtain income from two or more sources within China;
- Earn income from outside of China – but only if they are resident or are non-residents who have lived and worked in the country for more than one year;
- Receive taxable income for which there is no withholding agent;
- Adhere to other conditions required by the State Council.
Individuals are required to submit their annual IIT declarations regardless of whether they have any IIT liabilities or not. A non-resident working in China for less than 12 months during the previous tax year is exempt from this requirement.
Anti-tax evasion efforts increase importance of compliance
The introduction of improved investigation methods over recent years have resulted in China’s tax authorities stepping up its anti-tax evasion activity in relation to foreigners. In Beijing, by screening zero tax declarations and singling out foreign enterprises with high profit margins and large numbers of foreign personnel, the Chaoyang Local Taxation Bureau was able to collect more than RMB 200,000 (US$29,943) worth of evaded IIT tax.
This means that employers and their expatriates should always seek to ensure that IIT is being paid in a correct and timely fashion and that they file annual declarations. In Beijing, Shanghai and other major cities, individuals can make their annual declarations online, using official WeChat social media accounts and mobile phone apps.
While ongoing efforts to improve the ease with which tax returns can be filed will go a long way towards improving compliance, it is no reason for either employers or expats to take their eye off the ball.
First published by China Briefing. Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters.
As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about the firm can be found at: www.dezshira.com.
