China individual income tax is required to pay by both foreign and local individuals working in the country. Chinese citizens must pay individual income tax (abbreviated as “IIT”) on all income sourced both domestically and overseas, while in most cases foreigners are only required to pay IIT on income derived in China.
For foreigners working in China, determining the applicability of individual income tax need to follow certain criteria and rules. Consulting with a professional Chinese taxation specialist can help take away all these annoyances.
Which Kind of Foreign Individuals are Subject to IIT in China?
To determine whether a foreign individual working in China is subject to Chinese tax, it is necessary to look at how much time he/she has spent in China, what is the source of his or her income, and where his or her employer is based.
Income sourced within/outside of China is determined by the individual’s actual working period within China, regardless of whether the employer paying the income is based in China or not.
(1) Foreign individuals residing in China for less than 90 days in a tax year;
(2) Foreign Individuals Residing in China for more than 90 days but Less than 1 year;
(3) Foreign individuals residing in China for more than 1 year but less than 5 years;
(4) Foreign individuals residing in China for more than 5 years consecutively.
Tax Calculation Method
The tax rate levied on that taxable income then depends on its accumulated amount. China adopts a progressive taxation system where the tax rate for freelancer’s incomes progresses in three levels from 20% to 40% and the tax rate for regular employees in seven levels from 3% to 45%. The IIT payable can be calculated by the below formula:
IIT Payable = Taxable Income x Applicable Tax rate - Quick Calculation Deduction(QCD)
A quick calculation method is used to simplify the tax calculation. Individual income tax on wages and salaries is payable on a monthly basis. An individual is also entitled to a fixed monthly deduction for expenses. Foreign individuals are advised to carefully assess the structure of the taxable income and income-generating activities in and out of China.
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