Income Tax in China for Individuals and Businesses

Income tax in China is a complex system, but understanding the basics can make a big difference. The tax year in China is the calendar year, and the tax filing deadline is typically April 30th.

Individuals in China are subject to a progressive tax system, with tax rates ranging from 3% to 45%. The tax rates vary depending on the individual's income level and filing status.

For individuals, the taxable income threshold is RMB 24,000 for the 2022 tax year, below which no income tax is payable. This threshold has been adjusted annually to reflect inflation and economic growth.

Businesses in China are also subject to income tax, with a tax rate of 25% for most businesses. However, some businesses, such as foreign-invested enterprises, may be eligible for a lower tax rate of 15%.

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Individual income tax in China is a complex system, but let's break it down. There are 9 categories of income, including employment income, business income, and rental income, each with its own tax rate and deductions.

For residents, employment income, remuneration for labor services, author's remuneration, and royalties are combined as 'comprehensive income' for aggregate tax calculation purposes. This means that these types of income are taxed together on an annual basis.

There are no local taxes on personal income in China, which is a relief for many individuals. However, companies must withhold and report individual income tax on a monthly basis for both residents and non-residents.

Here are the tax rates for business income: Annual taxable income (CNY)Tax rate (%)0 to 30,0005Over 30,000 to 90,00010Over 90,000 to 300,00020Over 300,000 to 500,00030Over 500,00035

A flat rate of 20% is applied on the remaining categories of income, including incidental income, rental income, interest income, dividends, and capital gains.

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China's individual income tax (IIT) law groups personal income into 9 categories, each with its own tax rate(s) and allowable deductions.

There are no local taxes on personal income in China.

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For resident individuals, employment income, remuneration for labour services, author’s remuneration, and royalties are combined as 'comprehensive income' for aggregate tax calculation purpose on an annual basis.

The tax rate for comprehensive income is a seven-level progressive tax rate, ranging from 3% to 45% based on the amount of taxable income.

Income from business operations is subject to a progressive tax rate of 5 levels, with the lowest class being 5% and the highest class being 35%.

A flat rate of 20% is applied on the remaining categories of income, including incidental income, rental income, interest income, dividends, and capital gains.

Tax exemption can be applied on various types of personal income, including prizes, interest on national debt, and subsidies.

The tax exemption amount is 5000 RMB for both residents and non-residents.

Here's a breakdown of the tax rates for different types of income:

Special Additional Deductions can help you reduce your Individual Income Tax (IIT) liability in China.

You can claim special additional deductions for specific expenditures, such as nursing expenses for children under 3 years old. The deduction amount is RMB 2,000/month for each child, or RMB 24,000/year for each child.

Children's education expenses are also eligible for special additional deductions. The deduction amount is the same as nursing expenses, RMB 2,000/month for each child, or RMB 24,000/year for each child.

Continuing education expenses can be claimed as special additional deductions, with a deduction amount of RMB 400/month, up to 48 months, or RMB 4,800/year, up to four years.

Healthcare costs for serious illness can be deducted, with a maximum deduction amount of RMB 80,000 based on actual basis.

Housing loan interest can also be deducted, with a maximum deduction amount of RMB 1,000/month for up to 240 months, or RMB 12,000/year for up to 20 years.

Expenses for supporting the elderly, such as parents over 60 years old or other legal dependents, can be claimed as special additional deductions, with a deduction amount of RMB 3,000/month, or RMB 36,000/year.

Here is a summary of the special additional deductions:

Business income tax in China is calculated based on the annual taxable income of your business. The tax rate ranges from 5% to 35% depending on the income level.

There are three types of business income tax rates: a seven-level progressive tax rate, a five-level progressive tax rate, and a proportional tax rate of 20%. The seven-level progressive tax rate applies to comprehensive income, which includes income from wages and salaries, remuneration for personal services, author's remuneration, and royalties.

The five-level progressive tax rate applies to income from business operations, calculated on an annual basis and prepaid on a monthly basis. The tax rate for this level is divided into five classes, with the lowest class being 5% and the highest class being 35%.

A proportional tax rate of 20% applies to income from interest, dividends, and bonuses, income from lease of property, income from transfer of property, contingent income, and other income.

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Here is a breakdown of the tax rates for business income tax in China:

Note that tax exemption can be applied to certain types of business income, such as prizes in science, education, technology, culture, health, sports, environmental protection, etc. awarded by provincial people's governments, ministries and commissions of the State Council, units above the Chinese People's Liberation Army, as well as foreign organizations and international organizations.

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Tax rates in China are progressive, meaning the more you earn, the higher the tax rate. For business income, the tax rates range from 5% to 35% depending on the annual taxable income.

There are three types of tax rates in China: comprehensive income, business operations, and other income. Comprehensive income is taxed at a seven-level progressive rate, ranging from 3% to 45%. Business operations income is taxed at a progressive rate of 5 levels, ranging from 5% to 35%. Other income, such as interest and dividends, is taxed at a flat rate of 20%.

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The tax rates for comprehensive income are as follows: 3% for the lowest level and 45% for the highest level. For business operations income, the tax rates are 5% for the lowest level and 35% for the highest level.

Here's a breakdown of the tax rates for business income:

Tax exemption is also available in China, with a tax-free allowance of 5,000 RMB for both residents and non-residents.

To file income tax in China, employers must submit a Filing Form for Individual Income Tax Withholding to the Tax Bureau within the first 15 days of the month following tax withholding.

Taxpayers deriving comprehensive income from multiple sources, or those with income from labor services, author's remuneration, or royalties, must make a settlement between March 1 and June 30 of the following year if their balance exceeds RMB 60,000 after deducting special deductions.

Employers must complete an Individual Income Tax Basic Information Sheet (Form A) when paying income to a taxpayer for the first time, based on the taxpayer's provided tax ID.

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Taxpayers with a total tax paid in monthly IIT filings less than the tax payable amount must also make a settlement between March 1 and June 30 of the following year.

Taxpayers who can apply for a tax refund must also make a settlement during this period.

Here are the scenarios requiring an annual reconciliation:

In China, tax law and regulations can be complex, but understanding the basics can help you navigate the system with ease.

Certain deductions are allowed under the IIT Law, such as payment for enterprise annuity and occupational annuity, which must comply with state provisions.

These deductions can help reduce your taxable income and lower your tax liability.

Expenditure for commercial health insurance and tax-deferred commercial pension insurance, also stipulated by the State Council, can be deducted as well.

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The six-year rule is a significant aspect of China's Individual Income Tax (IIT) law, which affects individuals without a domicile in China. Individuals who do not have a domicile in China will not be required to pay IIT on their worldwide income until they have lived in China for 183 days or more in a year for more than six years in a row.

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The six-year rule began on January 1, 2019, which is a crucial date to note when determining your tax obligations. The number of years before 2019 won’t be included in the six-year count, and individuals with no domicile in China won’t be subject to worldwide income before 2024.

To reset the six-year count, you can either live in China for less than 183 days in a tax year or leave China for more than 30 days in a row where your days of residence in China have reached 183 days in a tax year.

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The legal object of individual income tax in China is quite broad. It includes Chinese citizens who have obtained income by residing in China.

You don't have to be a resident of China to be considered a taxpayer, though. Foreign nationals who have obtained income in China are also subject to individual income tax.

Compatriots from Hong Kong, Macau, and Taiwan are also included in the legal object, regardless of their residency status.

In China, individual income tax is levied on a wide range of income sources, including but not limited to income from employment, business, and investments.

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Residents in China are considered individuals who have a domicile in China or stay for at least 183 days in a single tax year. They are taxed on their worldwide income.

Non-residents, on the other hand, are individuals who have no domicile and do not live in China, or who have no domicile but have resided in China for less than 183 days in a tax year. They are taxed on income sourced in China only.

Here's a summary of tax liabilities for residents and non-residents:

Resident taxpayers have a more complex tax calculation, using the cumulative withholding method, while non-resident taxpayers have a simpler method, deducting a standard deduction and applying applicable tax rates.

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As a resident or non-resident in China, it's essential to understand what types of income are exempt from individual income tax. Awards for achievements in various fields, such as science, education, and sports, granted by provincial governments, ministries, and commissions are exempt.

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You'll also be pleased to know that interest income on treasury bonds and other financial debentures issued by the state is tax-exempt. This is a great way for the government to encourage investment in the country's financial sector.

Subsidies and allowances issued on a unified basis in accordance with state provisions are also exempt. This includes welfare benefits, compensation, and relief funds. Insurance claims are another type of income that's tax-free.

If you're a member of the armed forces, you'll be happy to know that military severance payment, demobilization pay, and decommissioning pay are exempt. The same goes for settling-in allowance, severance pay, and basic pension or retirement pay for public servants and workers.

Here's a list of some of the tax-exempt income types mentioned in the IIT Law:

Individuals who stay in China for at least 183 days are regarded as resident taxpayers. This includes domestic employees and foreign employees who stay in China for an extended period.

Resident taxpayers have unlimited tax liability, meaning they pay individual income tax on their income obtained within and outside China. This includes income from employment, remuneration for labor services, author's remuneration, and royalties.

Non-resident taxpayers, on the other hand, are taxed only on their China-sourced income. This includes income from employment, remuneration for labor services, author's remuneration, and royalties, as long as the income is sourced in China.

The tax liability of resident taxpayers and non-resident taxpayers is summarized below:

Employers must decide whether an employee is liable for individual income tax. To calculate IIT for an employee, employers must determine whether the employee is a resident taxpayer or a non-resident taxpayer based on their domicile and residence time.

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Let's dive into the tax tables and rates in China.

The tax tables in China are divided into three main categories: comprehensive income, business income, and other income. Comprehensive income is taxed on a progressive scale, with rates ranging from 3% to 45%. Business income is taxed at a flat rate of 5% to 35%, depending on the level of income. Other income, such as interest and dividends, is taxed at a flat rate of 20%.

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For comprehensive income, the tax rates are divided into seven levels, with the lowest rate at 3% and the highest rate at 45%. The tax rates are applied to monthly taxable income, and the quick deduction is also applied based on the income level.

Here's a breakdown of the tax rates for comprehensive income:

The quick deduction is also applied based on the income level, ranging from 0 to 15,160 RMB.

For business income, the tax rates are divided into five levels, with the lowest rate at 5% and the highest rate at 35%. The tax rates are applied to annual taxable income, and the tax rate is divided into five classes.

Note that the tax rates and quick deduction are applied based on the income level after deducting the tax exemption, which is 5,000 RMB for both residents and non-residents.

Tax accounting and compliance are crucial aspects of income tax in China. The tax authority, the State Administration of Taxation (SAT), requires taxpayers to keep accurate and detailed records of their income and expenses.

Taxpayers must submit their tax returns by the end of April each year. The tax returns must be filed electronically through the SAT's online portal.

Deductions as per law can be a complex topic, but let's break it down into simpler terms. Special deductions refer to basic social insurance premiums and housing fund contributions made by employees, which are stipulated by laws and regulations. Each region has its own contribution rates, and contributions beyond those rates might not be pre-tax deductible.

For instance, employees are allowed to make additional contributions to the housing fund, but only up to 12 percent of their salary is pre-tax deductible. Contributions beyond that amount are not deductible.

The IIT system also allows for special additional deductions for specific expenditures. These deductions include nursing expenses for children under 3 years old, which can be up to RMB 24,000 per year per child. Similarly, children's education expenses, continuing education expenses, healthcare costs for serious illness, housing loan interest, and expenses for supporting the elderly are also eligible for deductions.

Here's a breakdown of the special additional deductions:

The IIT Law also allows for other deductions, such as payment for enterprise annuity and occupational annuity, which comply with state provisions. Additionally, expenditure for purchase of commercial health insurance and tax-deferred commercial pension insurance, which comply with State Council provisions, are also deductible.

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In China's digital era, accounting for individual income tax (IIT) is a complex task. The IIT Law counts the working period in days, including actual working days, public holidays, annual leaves, and training days.

Non-domicile individuals are subject to a special rule: a day spent in China for less than 24 hours is counted as 0.5 days when calculating their working period. This applies to those employed by both domestic and foreign employers or foreign employers only, who provide work in China and abroad simultaneously.

If you're a senior manager in a domestic Chinese enterprise, the actual work-time rule doesn't apply to you. Your director's fees, supervisor's fees, wages, and other similar income are considered sourced from China, regardless of whether you work in China.

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