Individual income taxes in the PRC

The amended Individual Income Tax Law of the People’s Republic of China took effect on 1 January 1994 The law unified the two personal income tax systems previously applicable to foreign and Chinese nationals.

Persons domiciled in China and persons resident in China for at least one year are generally subject to Individual Income Tax on income derived from sources both within and outside China (although exceptions apply in some cases). Other individuals are subject to tax on income derived from sources within China only. Individual Income Tax applies to:

Wages and salaries (at progressive rates from 5 per cent to 45 per cent);

Income of individual businessmen (at progressive rates from 5 per cent to 35 per cent);

Income from contracting for or leasing the operation of enterprises or institutions (at progressive rates from 5 per cent to 35 per cent); and

Income from personal services (at a flat rate of 20 per cent, with the amount of tax payable to be reduced by 0 per cent).

Royalties, interest and dividends, income from the leasing and assignment of property, casual income and other income determined as taxable by the State Council are also generally subject to Individual Income Tax at a fixed rate of 20 per cent.

The following items are exempt from the Individual Income Tax:

Interest on savings deposits;
Interest on government bonds;
Sate allowances and subsidies;
Social welfare, pension and other benefits;
Insurance indemnifications;
Income of foreign diplomatic personnel where tax-exempt under other Chinese laws; and
Other income approved as tax-exempt by the State Council

Individual Income Tax is calculated on a monthly basis. A standard deduction of RMB4,000 is allowed to non-domiciliaries with respect to wages and salaries.PLEASE NOTE THAT ON 7&8 FEBRUARY 2006, NEWSPAPERS ANNOUNCED THAT THIS DEDUCTION IS BEING INCREASED TO RMB4,800 IN BEIJING. WHILE THERE IS NO UNIFORMITY IN MANY AREAS OF TAXATION THROUGHOUT THE COUNTRY, IT IS EXPECTED THAT THE RMB4,800 STANDARD DEDUCTION WILL BECOME THE UNIFORM AMOUNT FOR THE COUNTRY. Other standard deductions apply to individual businessmen and income from personal services, author’s remuneration, royalties and income from the leasing or assignment of property. Individuals may deduct income tax paid outside China from the amount of Individual Income Tax payable on income from sources outside China. Donations to public welfare funds may also be deducted from taxable income.

The tax brackets for wages and salaries income are as follows:

Monthly taxable Income Tax rate
Up to RMB500 5%
Greater than RMB500 up to RMB2,000 10%
Greater than RMB2,000 up to RMB5,000 15%
Greater than RMB5,000 up to RMB20,000 20%
Greater than RMb20,000 up to RMB40,000 25%
Greater than RMB40,000 up to RMB60,000 30%
Greater than RMB60,000 up to RMB80,000 35%
Greater than RMB80,000 up to RMB100,000 40%
Greater than RMB100,000 45%

Employers are required to withhold Individual Income Tax from employee’s wages and salaries and to file tax returns with, and make payment to, the taxation authorities on a monthly basis. Such withholding agents are entitled to receive a commission of 2 per cent of the tax withheld. Individual Income Tax of individual entrepreneurs is calculated annually and prepaid in monthly installments. Taxpayers deriving income from sources outside of China are required to pay tax on that income and file relevant tax returns on an annual basis. Foreign-sourced income is converted in to RMB amounts for taxation purposes at official exchange rates.

The 90-days and 183-days Tests

Under PRC law, an employee who is not domiciled in the PRC can work in the PRC for up to 90 days without becoming subject to PRC income taxation, provided that the employer is not a PRC enterprise and the employee’s salary is not borne by a PRC office or other PRC establishment of the employer. In the case of an employee who is a tax resident of a country which has entered into an income tax treaty with the PRC, the 90-day safe harbour period is extended to 183 days in any calendar year.

An exception to this general rule is that, if an employee holds a senior management position or a directorship in a PRC enterprise (including an FIE such as a joint venture or a WFOE), the employee will be subject to PRC income tax on all income received from the enterprise, regardless of the amount of time the person spends in the PRC.

More than 90 (or 183) Days But Less Than The Full Calendar Year

An employee who spends more than 90 days or 183 days, as the case may be, but less than the full calendar year, in the PRC is subject to PRC income tax on a monthly basis in respect of taxable employment income arising in the PRC, at rates of up to 45 per cent. Employment income is considered to arise in the PRC if it is earned through the performance of services in the PRC.

One Full Calendar Year or More

If an employee spends a full calendar year in the PRC, his or her taxable employment income will include both (1) income arising in the PRC and (2) income arising outside the PRC which is paid by a PRC enterprise or PRC office or other PRC establishment of a foreign employer. In determining whether an employee has spent the full calendar year in the PRC, temporary absences (ie, trips abroad lasting up to 30 days) are disregarded unless they add up to more than 90 days during the year. Thus, if an employee is based in the PRC for an entire calendar year but is outside the PRC for more than 30 days on a single trip, or for more than 90 days in total during the year, the employee will not be considered to have spent the full year in the PRC for tax purposes. For an employee who is employed by or holds a position in an enterprise or institution in the PRC, time spent outside the PRC on personal leave or for training during the course of work in the PRC is not considered to be absence from the PRC for tax purposes.

A foreign employee who has spent at least five full years in the PRC is subject to tax on all employment income regardless of the locality of the source or the payer of the income.

Local Tax Bureaus

Although the State General Administration of Taxation in Beijing issues tax rulings which technically have nation-wide effect, in practice the various local tax bureaus around China may take number of different approaches to a given tax issue. Therefore, an expatriate employee (or the person’s employer) may, in some circumstances, wish to approach the local tax bureau to ask for an indication that a particular type of income will not be taxed.

‘Negotiating sessions’ are less frequent in individual tax matters than in the enterprise income tax area (and are generally less common than previously, following the PRC tax reforms), but nevertheless they may be an important part of the Individual Income Tax picture in China. Despite ongoing efforts by the central tax authorities in Beijing to ensure consistent enforcement of the national tax laws throughout China, the local tax bureaus still exercise a significant amount of discretion in determining how particular taxpayers in their district will be taxed.

What the PRC considers taxable:

Base salary Taxable
Bonus Taxable
Fixed cash allowances Taxable
Payment of personal income tax Taxable
Housing allowances Not taxable
Reasonable allowance for business trips Not taxable
Meal subsidies Not taxable
Relocation expense reimbursements Not taxable
Laundry expense reimbursements Not taxable
Language training expense reimbursements Not taxable
Payment of children’s education fees, if Not taxable
considered reasonable by local tax authorities
Home leave (ie, plane tickets to the employee’s Not taxable
Home country for the employee and his or her immediate family)