China is to amend its Individual Income Tax Law (IIT Law) again. The draft amendment just finished its first reading in the 3rd Session of the Standing Committee of the 13th National People's Congress (from June 19 to 22, 2018).


Since the first promulgation of the IIT Law in 1980, the IIT Law has experienced several rounds of amendment, with its current basic framework fixed by the 1993 amendment. The current IIT Law has a significant feature of imposing taxation under different rates based on the categories of income (about 11 categories now). While such feature has the benefit of being simple and easy to apply the withholding requirement, it fails to distribute the tax burden fairly among the taxpayers based on their actual ability to pay due to the lack of a catch-all definition of taxable income. Also, in comparison to the Enterprise Income Tax Law (EIT Law), the IIT Law has been too simple or much less sophisticated. Therefore the imbalance of the two income tax laws creates many loopholes for individual taxpayers in practice.

Highlights of Draft Amendment

The amendment bill has not yet been published as of the date of this write up. But from the interpretation on the draft amendment given by the Minister of Finance, we would like to highlight certain points below.

First, the amendment is to introduce an official definition of tax resident, even though taxation has always been imposed based on residency from the very first day of the EIT Law. The definition aims to match the 183 day rule under most tax treaties, which is indeed a harsher position than the current one year requirement for residency under the IIT Law.

Second, the amendment is to introduce a partially comprehensive income category of earned income, which will include salaries, service income, authorship income, and royalties. This lays the ground for the adoption of a catch-all definition of taxable income in the future.

Third, the amendment is to further increase the standard deduction from the current amount of RMB3,500 per month to RMB5,000 per month, and introduce additional deductible items for expenditures on education, medical, rental, mortgage interest, etc.

Fourth, the amendment is to adopt similar anti-tax avoidance rules as those provided under the EIT Law. This means that we will see the arm's length rule and general anti-avoidance rules (GAAR) being incorporated under the new IIT Law.


While the amendment is still in draft form and will be subject to additional readings (likely two more) in the coming months before the amended IIT Law can be published, it is very likely that the above highlighted regimes or provisions will be retained in the final law. This means both good news and bad news for taxpayers.

While PRC tax residents may enjoy more deductions than before, a lower residency threshold can grab more foreign individuals into China's taxation net. We expect that the current favorable 5 year rule in practice for foreign individuals to be taxed as a Chinese tax resident will be gone too. Most significantly, the anti-tax avoidance rules will become a powerful tool for the Chinese tax authority to challenge transactions involving Chinese individual tax residents. Many of the planning techniques under the current IIT Law will no longer work when the new IIT Law takes place. This can significantly impact the dynamics and transactional structures for Chinese investors and their counterparties when they are making overseas investment.

Another related development is that China is in the process of merging its local tax offices and state tax offices. Once the merger is done, coupled with the new IIT Law, we expect an incremental increase in audit risk for all taxpayers since audits can be more easily coordinated and initiated by this single tax authority than before. Hence, it is now a good time, before the new IT Law comes into place, to review and consider any transition measures or restructuring if you are dealing with Chinese individual investors.