China’s new IIT law

A new individual income tax (“IIT”) law has come into effect on 1 January 2019. The tax residency stipulations for non-domiciled individuals have been amended by the new IIT law.

Tax residents vs. non-tax residents

In practice, tax residency should be firstly determined for a non-domiciled individual’s initial IIT filing in a calendar year, as the tax consequences for tax residents and non-tax residents are different under the new law (as compared page down):

Note: The taxation provisions are summarised below: 

Six-year rule

For non-domiciled individuals who have stayed in China for more than six consecutive years, their worldwide income is taxable, if they have stayed in China for 183 days or more in a calendar year from the seventh year onward. The “six year” refers to stays in China for 183 days or more in each of six consecutive years, without any single trip outside China for more than 30 consecutive days in any calendar year within the six years.

The best approach to avoid being taxed on worldwide income is to travel outside China for more than 30 consecutive days in a calendar year. Then, the existing six-year period can be broken up and a new six-year period will start being counted in the following year. 

Non-taxable benefits for tax residents

Non-domiciled individuals meeting the China tax residency criteria during 2019 and 2021 can opt for the existing tax exemption policies (option a) or the new deductions policies (option b) as listed in the table below. 

As of 1 January 2022, some benefits in option (a) will cease to be effective. Only non-domiciled individuals regarded as China tax residents can enjoy option (b). Each deduction item under option (b) is capped, as opposed to unlimited deductions in option (a). Hence, foreign individuals’ IIT costs are expected to rise at this point.