It has been 2 years since the new IIT came into effect, and everyone must have had some unique experiences early this year dealing with HR or financial departments urging you to complete personal declarations, or final settlements, and so forth. So, most likely, you now have a clearer understanding of the “Comprehensive Income” mechanism and the upcoming 2nd annual settlement. If you don’t, feel free to contact us.
Assuming you do, though, here are some important reminders that may help with upcoming IIT planning:
1. Are you a Chinese resident taxpayer? Is there any tax-free part of your individual income?
For foreign taxpayers, it is important to pay attention to these time points: 90 days of accumulated residence time; 183 days of the accumulated residence time; and a continuous 6 years of residence. Also, pay attention to whether income is paid domestically or from overseas.
Due to COVID-19, in the fiscal year of 2020, it is very likely that foreigners with no official domicile in China will not be deemed to have residence in China for the requisite 90 days. For this group, income derived from China but paid by overseas entities could be exempted from Chinese IIT.
In addition, foreign friends with no official domicile in China are reminded to pay attention to the “6-year” policy: if you have resided for 183 days in a given tax year, but your total residence years amount to less than 6 consecutive years, income from overseas and paid by overseas could be exempted from Chinese IIT. More importantly, if you leave China for more than 30 days once in any year, the “consecutive 6 years” are deemed to restart from 0. Therefore, if 2020 is about to become your 6th consecutive year, please consider whether you need to plan a quick trip.
2. Annual Bonus
A year-end bonus paid in a lump sum (i.e., the “Annual Bonus”) is considered to belong to salary, and should be calculated under the “Comprehensive Income” mechanism. However, during the 3-year transitional period before December 31, 2021, the Annual Bonus can still be taxed separately, instead of being included in the current year’s “Comprehensive Income”. Such separate taxation is calculated by using the monthly tax rate, applied to the average amount after the Annual Bonus is evenly distributed to 12 months.
You are allowed to choose whether to tax separately or to use the “Comprehensive Income” mechanism. Of course, that decision should be made based on whichever method is more “taxation economical,” and will require a detailed analyzed with each individual’s situation.
Below is a simple example of how to determine the critical amount under a separate tax method for your reference.
If the annual bonus = 36,000 RMB, separate method: IIT = 36000 / 12 * 3% (monthly tax rate for 3,000 RMB) = 1,080 RMB; if annual bonus = 36,001 RMB, separate method: IIT = 36000 / 12 * 10% (monthly tax rate for 3,000.08 RMB) – 210 (quick calculation deduction of 10%) = 3,390.1 RMB
Considering this example, maybe the employer could consider helping their employees with the separate method, applying an annual bonus within the considered 36,000 RMB, and meanwhile helping them declare and pay IIT comprehensively for those parts exceeding 36,000 RMB.
3. Special Additional Deductions
The implementation of Special Additional Deductions of foreign taxpayers is also in a 3-year transitional period. Prior to December 31, 2021, foreigners meeting resident requirements can choose to apply the Special Additional Deductions under the comprehensive mechanism, or choose the previous tax exemption policy.
Which is more favorable? Not so clear. If the Special Additional Deductions is selected, and if it has a decisive effect on the applicable tax rate to your annual comprehensive income, it is possible that the reduced taxation amount may exceed the amount of direct tax exemption. Again, this is a very individual consideration.
It is also important to note that although we are still the 3-year transition period, the transition policy will soon be off the table. If you would like to further examine your IIT burden, it is suggested to do more detailed and complex tax-planning under the new IIT system, taking into account, for example, taxation of business income, interest, dividend, and bonus income, and so forth.
This is a highly complex and individualized area of the law in China, but we hope that the above IIT reminders can help you to prepare better going forward. Da Wo Law Firm is committed to providing professional and efficient services of tax compliance solutions for clients, so please feel free to contact us.