China’s five year tax rule for foreigners is expected to be canceled. On June 19, 2018, China’s Ministry of Finance has unveiled a series of Draft Amendments to its individual income tax (IIT) Laws. These proposed changes are aimed at easing the tax burden for lower-income earners in particular, while taking a tougher stance on both foreigner workers and high-income earners.
New IIT System for Foreigners
Foreigners living and working in China will now be subject to the 183-day test, a rule that draws upon recognized international practices. This test deems a foreign individual who resides in China for 183 days or more in a year a ‘resident’ and subjects them to Chinese tax on their worldwide income.
This new 183-day-test will replace the previous five-year-rule under which a foreign individual will be subject to Chinese tax on their worldwide income if they live in China for more than five years.
1. Resident taxpayers
Foreign individuals reside in China ≥ 183 days (within a tax year);
2. Non-resident taxpayers
Foreign individuals reside in China ＜ 183 days (within a tax year).
Current Taxable Income for Foreign Individuals
Once the Draft Amendments come into effect, this Five Year Tax Rule is no longer valid. Under the new system, a foreign individual who resides in China for 183 days or more in a year a ‘resident’ and subjects them to Chinese tax on their worldwide income.
Calculation of an individual’s tax payable are:
Monthly taxable income = Monthly income - RMB 4,800 - Allowances
Tax payable = Monthly taxable income * Applicable tax rate - Quick calculation deduction
Note:
1. RMB 4,800 is the standard deduction for foreigners;
2. The current deductible allowances applicable are no longer available in the new tax system.
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