Foreigner IIT Exemption Threshold to Remain the Same

The individual income tax (IIT) exemption threshold will remain unchanged for foreigners in China, despite an increase in the amount of the “necessary deduction,” according to the newly released revisions to the “Regulations for the Implementation of the IIT Law (State Council Decree [1994] No.142).”

For taxpayers who do not have domicile in China, but obtain wages or salaries within China, or those who have domicile in China but obtain wages or salaries outside China, their deductible income for IIT payment is comprised of two parts according to China’s IIT Law – (1) deduction of “necessary expenses” and (2) “additional deduction” of expenses.

The 2008 revisions to Decree No.142 (State Council Decree [2008] No.519) stipulated that the amount of “necessary deduction” before IIT calculation shall be RMB2,000 and the amount of “additional deduction” shall be RMB2,800, making the aggregate deductible income stand at RMB4,800 for foreigners employed in China, or people with domicile in China but employed overseas.

Following the recent approval of the National People’s Congress to increase the “necessary deduction” from RMB2,000 to RMB3,500, the latest revisions (State Council Decree [2011] No.600) to Decree No.142 – announced on July 19 – adjusted the amount of “necessary deduction” up to RMB3,500 while at the same time reducing the amount of “additional deduction” from RMB2,800 down to RMB1,300. Thus bringing no changes to the total amount of deductible income for foreigners employed in China or people with domicile in China but employed overseas.

The newly revised “Regulations for the Implementation of the IIT Law” will come into force on September 1, 2011. A comparison of the current and upcoming tax rates looks like this:

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