This brochure is brought to you by Ecovis Beijing and helps you to understand the Individual Income Tax in China. Besides important deadlines and regulations you will find an overview of the most common problems for foreigners when dealing with there Individual Income Tax. For every foreigner in China the annual income filing is a duty, if their salary exeeds 120.000RMB. Staying in compliance but avoiding tax is our goal and thus we wrote this brochure to help you with information on Individual Income Tax in China.

1. INFO
Individual Income Tax in China
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By the end, you will understand:
 Main Factors of IIT Liability
 The Influence of the Level of Income
 The Influence of the Duration of Stay
 The 5-year Rule
 Salary Structure
 Penalties
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2. I N F O
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The Ground Rules
lancer’s incomes progresses in three levels from 20%
to 40% and the tax rate for regular employees in seven
levels from 3% to 45%. A tax exemption of 4800 RMB
per month for expats and of 3500 RMB per month for
locals are granted. Furthermore, for each individual
taxation grade there is a quick deduction amount that
will be exempted additionally for this level of taxable
income. Table 1 gives an overview of IIT taxation
grades.
Thus, a quick formula to calculate the IIT burden is:
Main Factors of IIT Liability
[(Gross Monthly Taxable Income –
To understand when foreigners working in China will
4800) * Tax Rate] – Quick deduction
be liable to pay IIT, it is important to know about several key factors. Whether IIT needs to be paid by an
expat in China or how much IIT needs to be paid depends on:

How much the expat earns

How long the expat stays in China

Who bears the expat’s income

What kind of positions the expat is holding in
his host country and home country company
Level of Income
First of all, it needs to be clear which portions of the
money an expat receives from the employer are
deemed to be taxable income by the Chinese authorities. This includes the base salary, incentive compensations such as commissions and bonuses, cash allowances and contributions to an overseas insurance
scheme.
The tax rate levied on that taxable income then depends on its cumulated amount. China adopts a progressive taxation system where the tax rate for free-
Duration of Stay and Payment Source
Furthermore, it has to be determined which part of the
worldwide income the expat might receive for various
assignments from various sources is deemed taxable
in China. The second important factor in determining
an expat’s IIT liability is therefore the duration of
his/her stay in China. The relevant thresholds for IIT liability are 1 day, 90 (respectively 183) days, 1 year
and 5 years. In combination with the third important
factor, the source of payment for the expat’s income,
we can then determine which part of his/her worldwide
income an expat needs to pay IIT in China.
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3. I N F O
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Grade
Gross Monthly Taxable Income (RMB)
Tax Rate (%)
Quick Deduction
1
≤ 1.500
3
0
2
> 1.500 ≤ 4.500
10
105
3
> 4.500 ≤ 9.000
20
555
4
> 9.000 ≤ 35.000
25
1005
5
> 35.000 ≤ 55.000
30
2755
6
> 55.000 ≤ 80.000
35
5505
7
> 80.000
45
13505
Table 1: Overview of IIT Taxation Grades
If the expat is being paid for his assignment in China
well. If he stays in China for less than a year, he will
by a Chinese company – i.e. his income is borne by a
not have to pay IIT on the income derived outside of
Chinese legal entity – then he/she will be liable to pay
China. However, there is one exemption to this. In the
IIT from his first day on. In contrast, if the expat’s in-
case where the expat should hold a dual senior man-
come derived from China is borne by an overseas enti-
agement role in China and another country and should
ty, and he/she stays in China for more than 90 days,
the payment for his work outside of China be borne by
this income is subject to PRC IIT. If there is a tax treaty
a Chinese entity, then the expat will have to pay IIT on
between China and the expat’s home country, this
the income derived from out of China from the very first
threshold is usually extended to 183 days.
day.
Furthermore an expat might not only have to pay IIT in
The final and most tax-intensive case where the expat
China on his income derived from activities in China,
will be liable to pay Chinese IIT on his worldwide in-
but possibly also on additional income derived from
come is referred to as the “Five-Year-Rule”. It applies
outside of China. Again, IIT liability on worldwide in-
when the expat has been staying in China continuously
come depends on the duration of stay and the source
for a period of more than five years, i.e. has been a tax
of payment for that income.
resident for more than five years. Then, all income derived from overseas and borne by overseas entities will
If the expat’s out-of-China income is borne by a Chi-
also fall under the Chinese IIT regime.
nese legal entity and the expat stays in China for more
Table 2 gives an overview of the discussed scenarios.
than one year, he will have to pay IIT on this income as
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4. I N F O
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Period in China
Income derived from China
Income derived out of China
(e.g. Germany)
Income borne by
China entity
Income borne
by Overseas
entity
Income borne
by China entity
Income borne
by Overseas
entity
Pay
Exempted
Exempted*
Exempted
> 90/183 days but < 1 year
Pay
Pay
Exempted*
Exempted
≥ 1 year and ≤ 5 years
Pay
Pay
Pay
Exempted
> 5 years
Pay
Pay
Pay
Pay
≤ 90 days
≤ 183 days (with treaty)
* taxable for expatriates who hold dual senior management role.
Table 2: Overview of Discussed Scenarios
Practical Advice
However, the 5-year-rule does not necessarily apply to
every expat who would like to live in China for a prolonged period of more than 5 years. There are two
possible scenarios in which IIT liability on the expat’s
world income could be avoided.
Scenario 1: Before the fifth year
The first scenario is that the expat leaves China, be it
for business purposes or for visiting his home country,
5-year-rule
for more than 90 days consecutively or more than 30
Five years is an important threshold for determining
days for a single trip within any given year before
expat IIT liability: an expat who is a tax resident in Chi-
he/she has been a tax resident for 5 years. By doing
na for a consecutive five years will have to pay PRC
this, the expat has broken tax residency and the
IIT on all of his income, no matter where it was derived
“clock” for the 5-year-rule will be reset. For example,
and no matter by whom it is borne. That is, after five
the expat can arrange to leave China for the necessary
years of tax residency an expat will be taxed in China
time period in the fifth year of his tax residency. Upon
on his/her worldwide income. This rule should always
his return, tax residency will then be calculated from
be kept in mind, since going over the 5 years can sig-
year one again.
nificantly increase an expat’s tax burden.
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5. I N F O
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keeping the IIT that the expat already needs to pay at
a reasonable level. A very effective method of reducing
the IIT burden is to structure the expat’s salary in the
right way. When designing the expat’s labor contract,
the employer and employee can cooperate to achieve
a higher net salary for the expat while keeping the
gross salary low at the same time – an arrangement
Scenario 2: After the fifth year
both sides will benefit from. There are two possibilities
In the second scenario the expat might have missed
for doing this: the introduction of fringe benefits into the
the deadline for leaving China for an appropriate
labor contract and the introduction of an annual bonus.
amount of days and has already been a tax resident
for more than 5 years. Now there are two possibilities
for the expat:
Tax Exemption for Fringe Benefits
(1) For the sixth year, the expat could arrange to spend
For foreign nationals working in China the Chinese
more than 90 consecutive or more than 30 days in a
regulations allow for certain benefits provided by the
single trip outside of China. This would mean that the
employer to be exempt from IIT, i.e. those benefits will
expat has broken tax residency in this year. All of his
not be part of the expat’s taxable income. This includes
China source income will be subject to IIT, but his
the Chinese social security insurances, allowances for
world income will not be. However, this measure will
meals, laundry, relocation and housing, home-leave for
not “reset the clock” of the 5-year-rule and has to be
the expat for up to 2 round-trips per year, fees for Chi-
repeated in the seventh and all the following years.
nese language training and tuition fees for the education of the expat’s children.
(2) If in the sixth year the expat stays in China for less
than 183/90 days (depending on the tax treaty be-
For such benefits to be tax-exempt, certain conditions
tween his home country and China) then the tax resi-
need to be met. Otherwise they will be treated as nor-
dency is also broken. Only his/her China source in-
mal taxable income. First of all, the overall amount of
come borne by a Chinese entity will be subject to IIT.
benefits provided has to be reasonable, which means it
Furthermore, the “clock” of the five year rule will also
generally should not exceed about 30-40% of the
be reset and this measure thus does not need to be
gross base salary. Furthermore, the benefits cannot be
repeated every year. In other words, if the expat man-
provided on a cash basis, but rather need to be paid to
ages to travel out of China for more than half/three
the employee on a non-cash or reimbursement basis,
quarters of the sixth year, the five-year-rule will not be
for which an official tax receipt (Fapiao) is mandatory.
applicable anymore. In addition, upon his return, his
For example, a housing allowance can only be tax-
tax residency will be calculated from year one again.
exempt if (a) either the employer pays rent to the landlord directly or if (b) the employee pays the rent on his
own and then provides the Fapiao for his/her payment
Salary Structure
to the employer, who reimburses the amount.
Apart from considerations of basic IIT liability on different parts of the expat’s income, there are also tips on
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6. I N F O
All in all, this means that for the benefits provided,
Three of the four bonus payments will Client logos
be treated as
supporting documentation has to be kept, including for
being part of the base salary: the amount of those bo-
example lease agreements, Fapiao and of course the
nus payments will be divided by twelve and added to
employment contract, which needs to contain a de-
the monthly base salary in order to determine the tax
tailed and correct account of all applied benefits. This
rate. Note that in some cases, when the base salary is
should always be kept in mind when implementing this
lower than in this example, this might also lead to the
type of salary structure in practice.
base salary itself being taxed with a higher rate, since
adding the bonus payments could push the salary in to
a higher tax bracket.
In our case however, the base salary with the bonus
payments will still be taxed with a rate of 45%. The IIT
burden on this part of the bonus is therefore:
3* RMB 50,000 * 0.45 = RMB 67,500
The fourth bonus payment however will receive preferential treatment and be taxed with a rate of 10%, since
this corresponds to the tax rate that one twelfth
Structure of Annual Bonus
(50,000/12 = RMB 4,167) of the bonus would be taxed
Another way of structuring a salary to reduce the IIT
with. The IIT burden on this part is therefore:
burden for (foreign and Chinese) employees is the implementation of an annual bonus. Such a bonus will
receive preferential tax treatment: it will be divided by
(RMB 50,000 * 0.1) – 105 = RMB 4,895
The total IIT burden on the bonus is now RMB 72,395.
twelve to determine the corresponding monthly amount
and will be taxed according to the respective tax
bracket of this monthly amount. This leads to lower
Scenario 2: Annual bonus
taxation than the same amount being paid together
Consider now an employee with the same base salary
with the monthly salary. However, this preferential
of RMB 85,000 and the same total annual bonus
treatment will only be applied to one bonus payment
amount of RMB 200,000, but paid only once per year
per year, other bonus payments will be taxed with the
instead of quarterly. The tax burden on the base salary
regular rates. An example serves to illustrate this:
is of course still RMB 22,585. The tax burden on the
bonus is lower though, since the whole bonus now receives preferential treatment. It will be taxed with a rate
Scenario 1: Quarterly bonus
of 25%, as the amount of one twelfth of the bonus
Assume an employee with a base salary of RMB
(200,000/12 = RMB 16,667) falls into this tax bracket.
85,000 per month and a quarterly bonus of RMB
The IIT burden on the bonus is therefore:
50,000. The tax rate for the base salary is 45% and the
IIT burden on it will be RMB 22,585. This is calculated
(RMB 200,000 * 0.25) – 1,005 = RMB 48,995
As opposed to the first scenario, a total of RMB 23,400
by:
[(85,000 – 4,800) * 0.45] – 13,505 = 22,585
per year can be saved on IIT:
RMB 72,395 – RMB 48,995 = RMB 23,400
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7. I N F O
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Did you know?
By violating any of the described regulation concerning the individual income tax in China, you will be responsible
and can face the potential penalties as outlined in the table below. It is not an issue that should be taken lightly.
Violation
Penalties
Late filing
≤ RMB 10,000
Late payment surcharge
0.05% per day
Under-declaration of IIT by tax payer
50 % - 500 %
Tax payer involved in falsifications and misreporting of figures
≤ RMB 50,000
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8. I N F O
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Grace Shi
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Partner
Phone:
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www.ecovis.com/beijing
Phone:
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E-Mail:
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Room 10820, Building A, Galaxy Soho, No.7A Xiao Pai Fang Hutong, Dongcheng District, Beijing, 100010 P.R.China
About ECOVIS R&G Consulting Ltd.
ECOVIS is a leading global consulting firm originating from Germany. It has over 4,500 professionals in more than 50 countries. Its consulting focus and core competencies lie in the area of tax consulting, accounting & auditing, and legal advice.
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