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China’s Individual Income Tax in 2023: What You Need to Know

China’s Individual Income Tax in 2023: What You Need to Know

Table of Contents

  1. China Individual Income Tax Rates
  2. Tax Residency in China
  3. Deductions and Exemptions
  4. Tax Law for Foreigners
  5. Consult the Tax Solutions with China Payroll

Since its implementation in 1980, China has been progressively reforming and enhancing its individual income tax (IIT) system. The objective of these reforms is to ensure equitable taxation for all individuals, while also minimizing any adverse effects on economic growth and social stability. This article aims to present a comprehensive overview of the current regulations governing the China individual income tax, covering aspects such as tax brackets, deductions, and guidelines applicable to foreigners residing in China.

China Individual Income Tax Rates

In China, residents are subject to a progressive tax rate system and are liable for taxes on their global income. However, non-residents are only taxed on income generated within China. Personal income in China is classified into nine distinct components, which collectively constitute an individual’s overall income. Below are the nine components that contribute to an individual’s income:

  • Wages and salary;
  • Income from remuneration for personal service;
  • Income from the author’s remuneration;
  • Income from royalties;
  • Business income;
  • Income from interest, dividends, and profits distribution;
  • Income from rental;
  • Income from the transfer of property;
  • Incidental income.

The initial four types of income should be aggregated when calculating the annual income. Various types of income are subject to different tax rates. For instance, when it comes to wages and salaries, the individual income tax law in China sets a threshold of 5,000 yuan. Moreover, the updated tax rate structure has expanded the range of tax brackets, allowing taxpayers to benefit from varying degrees of tax reduction. The tables provided below illustrate the different tax rates corresponding to different income levels.

Personal Income Tax Rates

  • Level 1: Monthly taxable income of less than 5,000 yuan is exempt from tax.
  • Level 2: Monthly taxable income between 5,000 and 12,000 yuan is taxed at 3%.
  • Level 3: Monthly taxable income between 12,000 and 25,000 yuan is taxed at 10%.
  • Level 4: Monthly taxable income between 25,000 and 35,000 yuan is taxed at 25%.
  • Level 5: Monthly taxable income between 35,000 and 55,000 yuan is taxed at 30%.
  • Level 6: Monthly taxable income between 55,000 and 80,000 yuan is taxed at 35%.
  • Level 7: Monthly taxable income of more than 80,000 yuan is taxed at 45%.

The formulas used to calculate taxable income and the corresponding tax payable are as follows:

  • Taxable income = (Total income) – (Initial deduction) – (Special additional deduction/Tax-deductible allowance (especially for foreigners)
  • Tax payable = (Taxable income*Tax rate) – (quick deduction)

The above rates are applicable to all individuals, including Chinese and foreign nationals, residing in or deriving income from China. However, there are some special cases where the tax rates may be different. For example, individuals who are over 60 years old or who have a disability may be eligible for a reduced tax rate.

The individual income tax is calculated on a monthly basis, and the tax is withheld by the employer from the employee’s salary. At the end of the year, the employee must file an income tax return with the tax authorities. The tax return will determine if the employee has overpaid or underpaid their taxes, and the tax authorities will adjust the amount of tax owed accordingly.

Tax Residency in China

Tax residency in China is determined by a combination of factors, including the individual’s domicile, length of stay in China, and personal ties to China.

  • Domicile: An individual’s domicile is the country where they have their permanent home. This is usually the country where they were born or where they have lived for the most of their life.
  • Length of stay: An individual who stays in China for more than 183 days in a calendar year is considered a resident for tax purposes.
  • Personal ties: An individual who has close personal ties to China, such as family or business ties, may also be considered a resident for tax purposes.

If an individual is considered a resident of China for tax purposes, they will be taxed on their worldwide income, regardless of where it is earned. If an individual is not considered a resident of China for tax purposes, they will only be taxed on their income that is sourced from China.

There are a number of tax treaties between China and other countries that can affect an individual’s tax residency status. If an individual is a resident of both China and another country, the tax treaty may provide for a credit against the tax that is due in one country for the tax that is paid in the other country.

Deductions and Exemptions

One significant aspect of the new China individual income tax law pertains to deductions. These deductions encompass the existing “special deduction” and “other deductions,” along with the “cumulative special additional deductions” that became effective on January 1, 2019. The “special deduction” comprises four components:

  • Basic endowment insurance
  • Basic medical insurance
  • Unemployment insurance
  • Housing accumulation fund
  •  Under the “other deductions” category, the following items are included:
  • Annuities
  • Commercial health insurance
  • Tax-deferred pension insurance
  • Original value of property
  • Taxes and fees eligible for deduction

Specific Additional Deductions

Introduced in January 2019, the specific additional deductions encompass certain expenses such as children’s education and rent. The individual income tax (IIT) legislation allows the following personal deductions (non-refundable and without carryback/forward provisions) when determining taxable comprehensive income for residents: As per the guidelines from the State Administration of Taxation, the “cumulative special additional deduction” section should include the accumulated amount of deductions for children’s education, support for the elderly, housing loan interest or housing rent, and continuing education that taxpayers are eligible for in the current month. Since the implementation of the special additional deduction policy, employees have experienced significant reductions in personal income tax, providing them with valuable benefits.

Tax Law Foreigners in China

The Tax Law for Foreigners in China 2023 is a set of regulations that govern the taxation of foreigners who are resident or non-resident in China. The law is designed to ensure that all foreigners who earn income in China are subject to taxation, regardless of their nationality or residency status.

The law defines a “foreigner” as an individual who is not a citizen of China. It also defines “income” as any form of gain, including salaries, wages, bonuses, commissions, pensions, annuities, rents, royalties, interest, dividends, and capital gains.

The law provides for a progressive tax system, with rates ranging from 3% to 45%. The tax rate is applied to the individual’s taxable income, which is calculated by subtracting certain deductions from their total income.

The law also provides for a number of exemptions and deductions, including:

  • Exemptions for income earned outside of China
  • Deductions for housing expenses, medical expenses, and educational expenses

The law is administered by the State Administration of Taxation (SAT). The SAT is responsible for collecting taxes from foreigners and for enforcing the tax laws.

Foreigners who are resident in China are required to file an annual income tax return with the SAT. The return must be filed by the end of the month following the end of the tax year.

Foreigners who are non-resident in China are only required to file an income tax return if their income from China exceeds a certain threshold. The threshold is set at RMB 50,000 for individuals and RMB 100,000 for businesses.

The tax law for foreigners in China is complex and can be difficult to understand. If you are a foreigner who is considering working or living in China, it is important to consult with a tax advisor to ensure that you are in compliance with the law.

The number of days that foreigners live and work in China is calculated by counting the number of days that they are physically present in China. This includes days that they are in China for work, for vacation, or for any other reason.

There are a few different ways to calculate the number of days that a foreigner has been in China. One way is to keep a travel log. This can be a simple notebook or a more sophisticated app that tracks your travel. In your travel log, you should record the dates of your arrival and departure from China, as well as the dates of any trips that you take within China.

Another way to calculate the number of days that a foreigner has been in China is to use their passport. Your passport will show the dates of your entry and exit from China. You can also use your passport to track any trips that you take within China.

Once you have calculated the number of days that a foreigner has been in China, you can use this number to determine their tax residency status. If a foreigner has been in China for more than 183 days in a calendar year, they are considered a resident for tax purposes. This means that they will be taxed on their worldwide income, regardless of where it is earned.

If a foreigner has been in China for less than 183 days in a calendar year, they are not considered a resident for tax purposes. This means that they will only be taxed on their income that is sourced from China.

It is important to note that the number of days that a foreigner is physically present in China is not the only factor that determines their tax residency status. Other factors, such as their domicile and personal ties to China, may also be considered.

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