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Updates on China Individual Income Tax Law (IIT) Tax Exemption Rule for Foreigners

– Is the Six-Year Rule more favourable than the Five-Year Rule?

Individuals who have stayed in China for 183 days or longer (as compared to the old rules of one full year) in any tax year would now be considered as “Tax Resident” in China under the new widening definition of tax residency[1] and could be subject to IIT on their worldwide income.

Based on the newly updated regulations for the implementation of the IIT law published on 18 December 2018, the long-standing “5-year tax exemption rule” has now been extended to 6-years for foreigners who have no domicile in China but have stayed in China for 183 days or longer in any tax year with other modifications.

Is it now more favourable?

Under the old exemption, even if an individual had spent more than one full year in China (i.e., the old rule of the definition of tax residency), provided he or she did not have a domicile in China, his or her foreign income would not be subject to IIT by temporary absences from China in every 5 years by either:-

(1) being absent from China for at least one continuous period of more than 30 days every 5 years; or

(2) being absent from China for more than 90 days in aggregate within one tax year during the 5 year period.

Under the new exemption, the 5-year tax exemption rule has now been extended to 6 years. But the exemption would no longer apply to individuals who have been absent from China for more than 90 days in aggregate within one tax year during the 6 year period. For foreigners who have substantial establishments in China, it could be practically difficult for them to be absent from China for a continuous period of more than 30 days.

– How to determine whether an income will be subject to IIT?

The following handy flowchart illustrates under what circumstances an individual’s non-China sourced income would also be subject to IIT:-

As the changes in the tax exemption rules could have a huge impact to the individual tax liabilities of the expatriates working in China, employers and employees should seek professional advice to prepare for the reform.

OLN provides a full range of tax advisory services. If you have any questions regarding the above or on any tax issues, please contact one of the members of the tax advisory team.

[1] For a summary of the key changes in IIT please refer to [“China is reforming its individual income tax rules – are you ready?”] and for more details on the impact of the new IIT law on high net-worth individuals please visit [中华人民共和国个人所得税法修改 – 对您的潜在影响及所需的即时行动]