Top Tips and Common Misconceptions - Filing Taxes under China's New IIT Law

Our Assistant Manager for International Business Advisory, Ines Liu, offers advice for filing Individual Income Tax in China under the new IIT Laws. 

Tips for filing Individual Income Tax (IIT)

For Taxpayers:

For resident individuals who don’t derive salary income at all but only other type of comprehensive income, your additional itemized deductions will be deducted only at the time when the annual tax return is filed.

These taxpayers should properly collect and maintain all relevant supporting documents during the tax year in order to claim the relevant deductions via annual reconciliation.

For Foreign Individuals:

The revised law is intended to equalize the tax treatment of comprehensive income between Chinese nationals and foreign individuals. Foreign expatriates working in China are still permitted to receive tax-exempted allowances during the 3-year transition period.

After three years, without these allowances, expatriates would likely to be subject to higher IIT liability in China. After the three-year transition period, securing a competitive position will be a challenge for foreign individuals.

However, it might also potentially create some opportunities for new business models in order to compensate foreign talents. 

For Withholding Agents:

Since residents and non-residents are subject to different withholding tax rules, employers should pay close attention to the employees’ tax residence status to apply the correct tax treatment.

If the tax residency of a company cannot be determined at the beginning of a year, start with filing as a non-tax resident since this mechanism allows for adjustments for tax residents when they file their annual return.

What are the top three misconceptions about china’s new individual income tax law?

The concept of Domicile: 

Domicile is different from nationality but is a concept of habitual residence. Although for most people their place of domicile is the same as their place of nationality or residence. The habitual residence is assessed by three factors:

• Permanent registered address/household (like Huji)
• Family ties
• Economic ties

Therefore, for those who are considered as China domiciled individual, even if they spend less than 183 days in a tax year within China, they are still considered to be a China tax resident.

One-off Annual bonus methods:

After January 1, 2022, the year-end bonus will be taxed as part of the annual comprehensive income. Under the three-year transition period, taxpayers and their withholding agents can choose to either continue to enjoy the existing preferential tax treatment or place the bonus with other Comprehensive income together.

People tend to believe the current special tax treatment for annual bonus will save more tax, but this might not be the case. Taxpayers should examine the two approaches and choose the suitable method.

Healthcare expense for serious illnesses under the six additional itemized deductions:

Tax authority grants more flexibility to taxpayers.

For a couple with a minor child, a taxpayer or his/her spouse can choose to claim their own expense or their spouse’s expense, and any qualifying expense incurred by a minor child may be deducted by one of the parents. For the deduction quota, each of them must be separately accounted for.

The new IIT law is effective and fully implemented now. There are still a few circulars to be issued in terms of implementation and interpretations on certain areas. We will constantly monitor the upcoming circulars and share our insights in a timely manner.