The Chinese Government introduced reforms to personal taxes on August 31 – the largest such reforms in China in decades. The reforms will fundamentally change the method (and rates) by which tax is collected, and also impose new tax residency rules. The Individual Income Tax (IIT) reforms will take full effect from 1 January 2019, while the revised standard personal deduction and tax rates table will apply from 1 October 2018.
Some of the key changes which will significantly impact both locally employed and seconded employees in China are as follows:
- Tax residence rule (for non-People’s Republic of China (PRC) domiciled individuals): Will change from the current ‘full year’ concept to a 183-day based test. Tax residents are subject to tax in China on worldwide income.
- Five-year temporary relief: The 5-year rule under the current regime exempts non-PRC domiciled individuals from worldwide taxation in the first 5 years. It is unclear at this stage whether or not this rule will remain under the new regime. If it does, then taking a future ‘tax break’ will mean being outside of China for more than 183-days in a calendar year rather than the current 31 consecutive/91 cumulative days, which will not be practical in many cases. If it does not, then expats in China may be subject to worldwide income (including personal income) in each of the calendar year that they are in China for 183-days or more (i.e. tax resident).
- Expat tax concessions: Under the current regime, expats are exempt from taxation on eight categories of fringe benefits (e.g. housing, children’s tuition, meal expenses). There are speculations that such concessions will be abolished after the new law is implemented on the basis that a new personal itemised deduction will be introduced. If the expat tax concessions are abolished, employers will likely be facing the additional cost for picking up PRC tax on these fringe benefits. There are also concerns that the authorities will impose caps on the deductions, in which case there would be an incremental tax cost to the expats if their actual expenditure on the deductible items far exceeds the cap stipulated.
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