Individual Income Tax is levied on individuals in accordance with the Individual Income Tax Law of the People's Republic of China (newly revised in 2005) and the Regulations for the Implementation of the Individual Income Tax Law of the People's Republic of China (promulgated by the State Council and newly revised in 2005), and other regulations promulgated by the Finance Ministry and the State Administration of Taxation (SAT).
The taxpayers of the Individual Income Tax are the income earners, who can be divided into the following two situations:
1) Individual Income Tax shall be paid on their world wide income by the individuals who have domicile in China (referring to individuals who by reason of their family registration administration, family or economic interests habitually reside in China) or who, have resided in China for one year or more.
For the income derived from sources outside China by individuals not domiciled in China, they may, upon approval by the competent tax authority, pay Individual Income Tax only on the income paid by the enterprises and other economic organizations or individuals within China provided they reside in China for a period between one year and five years. Those with residing period longer than five years in China should pay Individual Income Tax on all of their foreign income starting from the sixth year.
2) Individuals who are neither domiciled nor resident in China or who do not have domicile and are resident for less than one year in China shall pay Individual Income Tax only on the income obtained from sources within China.
For individuals having no domicile in China and residing in China continuously or cumulatively for less than 90 days in one tax year, the part of their income from China which is paid by overseas employers and is not borne by the employers’ establishment or presence in China shall be exempt from Individual Income Tax.
Residing in China for one year means residing in China for 365 days in one tax year. No deduction shall be made for the number of days for temporary trips out of China for not more than 30 days during a single trip or not more than 90 days on accumulative basis over a number of trips within the same tax year.
The Tax year starts from January 1 and ends on December 31 under Gregorian calendar.
Regardless of the place of payment, the following income earned by taxpayer shall be regarded as from sources within China:
(1) The income derived from provision of labor services within China for post holding, employment, performance of contractual duty.
(2) The income from leasing properties to lessees to use within China.
(3) The income from transfer of buildings and land use rights within China or of other properties within China.
(4) The income from permitting the franchises to be used within China.
(5) The income of interest, dividends and/or bonuses obtained from enterprises and other economic organizations or individuals within China.
Regardless of the places of payment, the following income would be regarded as from sources outside China:
(1) The income from provision of labor services outside China for post holding, employment.
(2) The income from leasing properties to lessees to use outside China;
(3) The income from transfer of building and land use rights outside China or of other properties outside China.
(4) The income from permitting the franchises to be used outside China.
(5) The income of interest, dividends and/or bonuses obtained from enterprise and other economic organizations or individuals located outside China.
2. Taxable Items, Rates and Computation
The taxable items of Individual Income Tax are 11 in total, namely: wages and salaries, income derived by Individual Industrial and Commercial Households from production or business operation, income from contracted or leased operation of enterprises or institutions, remuneration from personal services, author’s remuneration, royalties, interest, dividends, bonuses, income from lease of property, income from transfer of property, contingent income, and other income specified as taxable by the finance department of the State Council.
Generally, for wages and salaries, the taxable income shall be the balance of monthly wages or salaries after deducting 1600 yuan as expenses and other specified items (at present including basic pension insurance, medical insurance, unemployment insurance, housing reserve funds). The Individual Income Tax payable shall be computed according to the 9 grade progressive rates (applicable to wage, salary income):
Grade Monthly Taxable Income ------------------------------------------- Tax Rate (%)
1) 500 yuan or less ------------------------------------------------------------ 5
2) That part of income over 500 but not over 2,000
yuan ------------- 10
3) That part of income over 2,000 but not over 5,000
yuan ---------- 15
4) That part of income over 5,000 but not over 20,000 yuan --------- 20
5) That part of income over 20,000 but not over 40,000 yuan ------- 25
6) That part of income over 40,000 but not over 60,000 yuan ------- 30
7) That part of income over 60,000 but not over 80,000 yuan ------- 35
8) That part of income over 80,000 but not over 100,000 yuan ----- 40
9) That part of income over 100,000 yuan ------------------------------- 45
The formula for computing the tax payable is as follows:
Monthly taxable income = Total monthly wages or salaries – 1600 yuan – Other deductible items
Monthly income tax payable = Monthly taxable income × Applicable rate – Quick deduction at each grade
For the taxpayers who have no domicile in China but derive wages and salaries from sources within China, or who have domicile in China but derive wages and salaries from sources outside China, apart from standard monthly deduction of 1600 yuan and other specified items, additional deduction for expenses in computing taxable income of the wages and salaries may be allowed in consideration of the average income level, living standard and the changes of exchange rates.
The additional deduction for expenses in effect now is 3,200 yuan per month. The formula for computing the taxable income is:
Taxable income = Monthly wages and salaries – 1600 yuan – Additional deduction (3200 yuan) – Other specified items
NOTICE: The material contained herein is in the nature of general comment and information ONLY and neither purports, nor is intended, to be advising on any particular matter. Readers should not act or rely upon any matter or information contained in or implied by the publication without taking appropriate professional advice.