Tax Planning forSmall and Medium Sized Enterprises in China

Individual Income Tax

for Expatriates in China

Individual Income Tax for Expatriates in China

• Individual Income Tax (IIT) is determined by the expatriate’s:

– length of time stayed in China;

– source of income.

Individual Income Tax for Expatriates in China

Determining IIT Based on Period of Residency

China Source Income Non-China Source Income

Days in China Position Level paid in Chinapaid outside

of Chinapaid in China

paid outside of China

No more than 90 days (183)

Staff Yes No No No

Top Management Yes No Yes No

≤ 90 (183) ≤ 1 year

Staff Yes Yes No No

Top Management Yes Yes Yes No

≤ 1 year ≤ 5 years All Yes Yes Yes No

More than 5 years All Yes Yes Yes Yes

Individual Income Tax for Expatriates in China

• An expatriate working for a Representative Office (RO) does not follow the 183-day rule.

Income Sources

• China Source Income:– Income generated in China.

• Non-China Source Income:– Income generated outside of China.

Income Sources

• China Source Income is:– Income from service, employment and performance

of contracts in China;

– Income from leasing property in China;

– Income from the assignment of property in China, e.g. buildings, land-use rights;

– Income from interests, dividends and bonuses from Chinese companies, commercial organizations or individuals in China.  

Position Level

• Top management positions includes:

– General Manager;

– Deputy Manager;

– Director;

– Functional Positions; and

– Other management positions.

Reimbursements Exempt from IIT

• An expatriate’s income may be IIT exempted for reasonable reimbursements such as:– Housing allowance, meal allowance and laundry

expenses;

– Relocation allowance for employment or demission in China;

– Reasonable per diem expenses from business trip in and outside of China;

– Expenses reimbursements for home leave；– Language training and education expenses.

Key Points About Declaring IIT(Employment Income)

• Employees have an obligation to pay IIT;

• Employers have an obligation to withhold IIT from employees;

• An employee’s taxable income is calculated by subtracting an allowed monthly deduction of RMB 4,800 from the monthly salary and wage;

• A progressive tax rate is applied to salaries and wages. The tax rate ranges from 5% to 45%;

• ITT is withheld by the employer and paid to the tax authorities before the 7th day of the following month.

Individual Income Tax Rates(Employment Income)

Grade Monthly Taxable Income (RMB) Tax Rate (%) Quick Deduction

1 500 or less 5 0

2 Over 500 but not over 2,000 10 25

3 Over 2,000 but not over 5,000 15 125

4 Over 5,000 but not over 20,000 20 375

5 Over 20,000 but not over 40,000 25 1,375

6 Over 40,000 but not over 60,000 30 3,375

7 Over 60,000 but not over 80,000 35 6,375

8 Over 80,000 but not over 100,000 40 10,375

9 Over 100,000 45 15,375

Calculating IIT(Employment Income)

Individual Income Tax (IIT) Payableequals

[Monthly Income – Monthly Deduction (RMB 4,800)] X Applicable Tax Rate – Quick Deduction

Example

A professor has a monthly salary of RMB20,000. The IIT payable is:

Taxable Income = RMB 20,000 – RMB 4,800 = RMB 15,200

IIT Payable = RMB 15,200 X 20% - 375 = RMB 2,665

Key Points About Declaring IIT(Service Contract Income)

• A contractor’s taxable income is calculated by subtracting an allowed monthly deduction of:– RMB 800 (if the service fee is less than RMB 4,000) or – 20% of the service fee (if the service fee exceeds RMB 4,000)

from the monthly contract service fee.

• A progressive tax rate is applied to contract service income. The tax rate ranges from 20% to 40%;

• Service contractors must paid IIT to the tax authorities before the 7th day of the following month.

Individual Income Tax Rates(Service Contract Income)

Grade Monthly Taxable Income (RMB) Tax Rate (%) Quick Deduction

1 4,000 or less 20 0

3 Over 20,000 but not over 50,000 30 2,000

4 Over 50,000 40 7,000

Calculating IIT(Service Contract Income)

Individual Income Tax (IIT) Payableequals

[Monthly Service Fee – Monthly Deduction Allowance] X Applicable Tax Rate – Quick Deduction

ExampleA independent contractor receives a service fee of RMB 3,500 for services

rendered in January. The IIT payable is:

Monthly Deduction Allowance is RMB 800 as service fee is less than RMB 4,000.

Taxable Income = RMB 3,500 – RMB 800 = RMB 2,700

IIT Payable = RMB 2,700 X 20% - 0 = RMB 540

Calculating IIT(Service Contract Income)

Individual Income Tax (IIT) Payableequals

[Monthly Service Fee – Monthly Deduction Allowance] X Applicable Tax Rate – Quick Deduction

ExampleIf the independent contractor received a service fee of RMB 30,000 for services

rendered in February. The IIT payable is:

Monthly Deduction Allowance is 20% of RMB 30,000 = RMB 6,000

Taxable Income = RMB 30,000 – RMB 6,000 = RMB 24,000

IIT Payable = RMB 24,000 X 30% - RMB 2,000 = RMB 5,200

Requirement to Declare IIT

• According to Individual Income Tax Law, an individual must declare IIT when they have: – An annual income over RMB120,000 (this excludes

individuals who have no residence in China and have lived in China for less than 1 year during a tax year);

– Salaries and wages from two or more companies in China;

– Earned taxable income that have not been withheld by an employer.

Annual Income over RMB 120,000

• Annual income over RMB 120,000 within the tax year includes income from the following sources :– Salaries and wages;– Incomes from production and operation of a privately owned

business;– Incomes from contracts and leasing of enterprise and public

institution;– Service fees;– Remuneration;– Income from interests, dividends and bonus;– Income from property leasing;– Income from property transfer;– Other.

Requirement to Declare IIT

• Expatriates with an annual income over RMB120,000 must declare and pay IIT to the tax authorities within three months after the tax year.

Tax Planning Tips

• If an Expatriate has resided in China for more than 5 years , their worldwide income is subject to IIT.

• An expatriate who has stayed in China for almost 5 years may break this 5 year residency rule if they stay 30 days outside of China on a single trip, or an accumulated period of 90 days in the calendar year.

• Expatriates should take advantage of the special tax calculation method for bonuses that are paid one-time during the year.

Tax Planning Tips

• Concept of FAPIAO and its relationship with tax preferential policy;

• Private car using for company；• Social insurance; • Commercial insurance; • Expatriate working as part-time in China:

Contact Us

NCO China

• tel:  +86 (10) 8447 8118• fax: +86 (10) 8447 9349• e-mail:  enquiry@ncochina.com• website: www.ncochina.com