The Standing Committee of the National People's Congress of China issued its Decision to Amend the PRC Individual Income Tax Law (IIT Law) on 31 August 2018. The amended IIT Law will come into effect on 1 January 2019 but the provisions regarding the higher basic standard deduction for the calculation of PRC Individual Income Tax (IIT) on wage/salary income and the two revised progressive tax rate tables took effect from 1 October 2018. The amended IIT Law reflects the most significant reform of the IIT regime since it was promulgated in 1980.

Major changes in the amended IIT Law

1. Introduction of the concept of tax resident

The amended IIT Law officially introduces the concept of “tax resident” for the first time to the IIT regime and adopts the internationally recognised “183-day” rule for determining the tax residency status of an individual without domicile in China; an individual with domicile in China or without an individual domicile in China but who has spent 183 days or more in aggregate within a calendar year in China will be deemed to be a PRC resident individual whose global income sourced both from inside and outside China shall be subject to IIT in accordance with the IIT Law. An individual who does not satisfy either one of those two conditions is a non-resident individual, who is required to pay IIT on his/her income sourced from China only.

These provisions have attracted significant attention from the non-PRC nationals who are working or are considering working in China because the threshold for dividing the two group of IIT payers shall be substantially lowered from one full year under the existing IIT Law to 183 days, which may cause more non-PRC nationals to pay IIT on their income sourced outside of China. However, it is worth noting that the “1-year” rule under the existing IIT Law has been in practice turned into a “5-year” rule by the implementation regulations for the IIT Law and the relevant circulars issued by the State Administration of Taxation (SAT), that is, the global income of an individual without domicile in China will be subject to IIT only after he/she has stayed in China for five full consecutive years. As such, it remains to be seen whether this “183-day” rule will apply literally as stipulated or whether interpretations and clarifications by the State Council and the SAT may reduce its potentially dramatic impact.

2. Adjustment of the categories of the taxation system

The amended IIT Law reduces the eleven categories of taxable income into nine and introduces the concept of “comprehensive income”. “Comprehensive income” covers four categories of taxable income including the income from wage and salaries, remuneration for labour services, author’s remuneration and royalties. The four categories under comprehensive income shall be subject to the seven brackets of progressive tax rates ranging from 3% to 45% as a whole. The income of individual industrial and commercial households earned from their production and business operations and the income from contracting or leasing enterprises and institutions are consolidated as “business income” subject to the five brackets of progressive tax rates ranging from 5% to 35%. “Other income specified as taxable by the financial department under the State Council” have been removed from the categories of the taxable income. The competent authority has not yet clarified and confirmed whether an individual’s income falling outside those listed in nine categories will cease to be subject to IIT after the amended IIT Law comes into effect.

3. Adjustment of the tax brackets and deductible items

The amended IIT Law adjusts the tax brackets of the progressive tax rates applicable to comprehensive income in the manner as shown below. The brackets for the progressive tax rates applicable to business income have also been adjusted.

Existing IIT Law (applicable to wage/salary income only)

Amended IIT Law (applicable to comprehensive income)

Tax bracket

Taxable income (monthly ) (RMB)

Taxable income (monthly) (RMB)[1]

Tax rate (%)


≤ 1,500

≤ 3,000



˂ 1,500 ≤ 4,500

˂ 3,000 ≤ 12,000



˂ 4,500 ≤ 9,000

˂ 12,000 ≤ 25,000



˂ 9,000 ≤ 35,000

˂ 25,000 ≤ 35,000



˂ 35,000 ≤ 55,000

˂ 35,000 ≤ 55,000



˂ 55,000 ≤ 80,000

˂ 55,000 ≤ 80,000



˂ 80,000

˂ 80,000


The standard basic deduction for calculation of taxable income is increased from RMB 3,500 per month which is applicable to wage/salary income only to RMB 5,000 per month (that is, RMB 60,000 per year) applicable to comprehensive income. This RMB 60,000 per year basic standard deduction applies equally to both PRC and non-PRC nationals.

In addition to increasing the standard basic deduction, the amended IIT Law also introduces a few special additional deductible items which include children’s education expenditures, continuing education expenses, medical expenses for serious illness, housing mortgage interests or housing rent and expenses for caring for the elderly. The specific scopes, standards and implementation procedures of such special additional deductible items are to be determined by the State Council.

It is expected that the working class and certain middle class tax payers will benefit from such adjustments resulting in a reduction of IIT on their wage/salary income. Foreign nationals might not benefit from the changes, as the authorities may revoke the additional deductible items and tax-exempted allowances, such as allowances for housing, meals and laundry expenses and allowances for his/her own language training and his/her children’s education, that are applicable to expatriate employees under the existing IIT Law. This has not yet been clarified. But the same deductions may apply to everyone, that is, the same deductions under the amended IIT Law will be applicable to all employees without special deductions and tax-exempted allowances for expatriate employees.

4. IIT annual filing and settlement

Under the amended IIT Law, a PRC resident individual is required to file a tax return and to settle IIT on his/her comprehensive income on an annual basis from 1 March to 30 June of the next year upon obtaining such income. However, the payers of comprehensive income are still obliged to withhold and pay IIT for and on behalf of a resident individual when they make payments to him/her. Details of the procedures and documentary requirements in respect of the annual tax filing and settlement are to be further determined by the State Council and the SAT. A non-PRC resident individual shall continue to follow the same rules under the existing IIT Law to pay IIT on his/her comprehensive income on a monthly or a transaction basis.

5. Strengthening the supervision and improving the administration of IIT

There are a few new rules under the amended IIT Law which help the tax authorities to improve the collection and management of IIT.

(a) Each IIT payer will have an identification number (that is, ID number of a PRC national or a number assigned by the competent tax authority to a non-PRC national) so that it will be easier for the tax authorities to track the information of IIT payers.

(b) A PRC national who seeks to de-register his/her household registration due to emigration is required to settle all IIT payable before he/she completes the de-registration formalities.

(c) The amended IIT Law introduces anti-tax avoidance rules which allow the tax authorities to make tax payment adjustments under the following circumstances:

  • Business transactions between an individual and his/her affiliates not on an arm’s length basis without justification and resulting in reduction of IIT payable by the individual.
  • A business establishment solely or jointly controlled by a resident individual in tax havens distributes a reduced amount of profits or no profit at all to the resident individual without any reasonable operational basis.
  • Any other arrangement without any reasonable commercial purpose which leads to inappropriate tax benefits to an individual.

(d) The amended IIT Law includes the information sharing provisions which require the relevant government authorities such as public security, people’s bank, financial administration, social insurance to assist the tax authorities in identifying the identity and financial account information of IIT payers and to provide relevant information to the tax authorities for supervision and tax collection purpose. In particular, the relevant registration authorities are required to verify IIT payment receipt in relation to transfer of properties or equity interests when dealing with the registration of the transfer.

Our comments

  1. Through the adjustment to the tax brackets and the deductible items, the tax burden on the IIT payers, especially the lower-middle class, is likely to be reduced after the amended IIT Law becomes effective. However, because the remuneration for labour services, author’s remuneration and royalties are consolidated into comprehensive income together with the wage/salary income subject to the seven brackets of progressive tax rates, those who receive both wage/salary and any other one category of income under the comprehensive income classification may need to pay a higher IIT than they would under the existing IIT Law which permits IIT to be calculated separately on different categories of income.
  2. The IIT implications on a non-PRC national working in China may be significantly affected due to the “183-day” rule. Further, although details are to be further clarified and interpreted by the State Council and the SAT, it appears that the PRC government intends to apply the same rules to PRC nationals and non-PRC nationals when calculating IIT on their taxable income, just as they universally applied the Enterprise Income Tax Law (EIT Law) to domestic enterprises and foreign invested enterprises from 2008. Non-PRC nationals may no longer be able to enjoy the additional deductions and tax-exempted allowances specifically provided to them for calculation of their taxable wage/salary income under the existing IIT Law from 2019.
  3. The amended IIT Law may also have an impact on the high net worth Chinese individuals who have business and/or assets overseas because of the anti-tax avoidance rules. Moreover, as the exchange of financial account information between China and other jurisdictions under the Common Reporting Standard has kicked off from September 2018, the SAT will be able to obtain more information on PRC nationals’ overseas income/assets for them to implement the relevant IIT rules and to collect IIT.
  4. The amended IIT Law suggests that the supervision and regulatory capacities of the PRC tax authorities have been highly enhanced. Under the existing IIT Law, the PRC tax authorities mainly rely on the enterprises (mostly the employers), to monitor IIT sources and to collect IIT (that is, withholding IIT by an enterprise as the payer for and on behalf of an individual as a payee). A few concepts and rules that used to be in the EIT Law only are being introduced to the amended IIT Law, such as tax residents, identification number of a tax payer, annual filing and settlement and the anti-tax avoidance rules, which shows that the PRC tax authorities are more sophisticated and confident in supervising and regulating IIT payers directly.

The way forward

The PRC government has been working on the reform of its major taxes such as the enterprise income tax and the value-added tax over the past ten years. IIT is the last major tax to be dealt with. The amended IIT Law will have a substantial impact on each IIT payer in China. The State Council and the SAT have started preparing the implementing rules and the relevant supporting measures to ensure the amended IIT Law can be enforced smoothly from 2019. We shall pay close attention to developments in relation to IIT and will provide further practicable details as the new IIT rules are issued and the various uncertainties are clarified.

  • IIT payers should keep an eye on the implementing rules on the special additional deductible items and the annual filing and the settlement so as to enjoy the benefits while fully complying with the new requirements.
  • A non-PRC national who is working or is considering working in China will need to follow up on the interpretation of the “183-day” rule and consider the possibility that his/her global income will be taxed in China.
  • An employer should also be familiar with the implementing rules on deductions and IIT filing/withholding on wage/salary income in order to fulfil its legal obligations as the withholding agent of its employees. Multinational corporations and foreign invested companies with expatriate employees may need to review and adjust the labour and tax arrangements of those employees based on the amended IIT Law and its implementing rules.
  • High net worth Chinese individuals who have business and/or assets overseas may need to reassess their tax situation under the amended IIT Law and adjust the business and/or assets arrangement if necessary for compliance purposes and for avoidance of potential risks.