The Regulations for the Implementation of the Individual Income Tax Law of the People's Republic of China (Guoling No.707)

22 December 2018

The State Council promulgated the Regulations for the Implementation of the Individual Income Tax Law of the People's Republic of China on 22 December, which will take effect on 1 January 2019. Article 4 stipulates that an individual who has no domicile and has resided in the Mainland for an annual aggregate of 183 days or more for less than six consecutive years, shall, upon filing records with the relevant tax authorities, not be required to pay individual income tax with respect to his/her income derived from sources outside the Mainland and paid by institutions or individuals outside the Mainland. If an individual has resided in the Mainland for an annual aggregate of 183 days or more but during which there is a single absence from the Mainland for more than 30 days, the continuous years of residence in the Mainland with an annual aggregate of 183 days or more shall be recounted.

Abstract

The State Council released the IIT DIRs for the specific implementation of the new IIT Law in the Mainland on 18 December 2018, which shall take effect from 1 January 2019.

Tax exemption for non-Chinese residents

The officially released IIT DIRs states that any person who has not resided for 183 days or more in the Mainland for six consecutive years would not be subject to IIT on their worldwide income. Accordingly, once non-Mainland domiciled individuals meet the "more than 30 days outside the Mainland" requirement, they can restart the 6-year count of having resided 183 days in the Mainland.

Expanding the eligible for additional itemized deductions to business operation income

The officially released IIT DIRs clearly states that where an individual deriving income from operation does not have comprehensive income may also enjoy specific deductions, which shall be deducted when an individual makes annual reconciliation.

Further measures details are to be clarified in specific policy documents

Compared with the consultation draft, the DIRs have been shortened from 44 to 36 articles. Below are the articles that have been simplified or excluded:

• Where an individual has an non-monetary asset exchange or uses his property for purposes such as donation, debt repayment, sponsorship, investment, etc, it is deemed as asset transfer
• General Anti-avoidance rules
• For an individual business, sole proprietorship enterprise or partnership whose annual income exceeds the amount prescribed by the competent tax department, the tax authority shall not levy individual income tax at a fixed amount on a regular basis, or by assessing the taxable income rate in advance
• Certain amendments on calculating foreign tax credits
• Tax clearance for cancelation of household registration
• Various departments share the relevant information on tax identification number, tax refund for annual filing and specific deductions with the tax authority

Some of the above articles are main points of focus in the current IIT law reform (e.g. General anti-avoidance rules), while some relate to complicated issues that have significant impact and require the taxpayers' careful consideration (e.g. non-monetary asset exchange deemed as asset transfer). Although these have not been included in the current DIRs, there will be subsequent circulars that provide further guidance on the above policies. In addition, detailed provisions on withholding and reporting of taxes will be later clarified in a consolidated special policy document.

Apart from the above major changes, the following minor amendments have also been made in the DIRs:

• The income sourcing principles have been simplified and remain the same as the previous DIRs;
• The definition for publication remuneration is revised to "income derived by individuals by virtue of the publication of their works in books, newspapers and periodicals";
• For income derived by individuals of which the taxable category is not easily determined, e.g. share trading, decisions on the tax treatment shall be escalated from the in-charge tax authority to the state-level tax authority, record filing should be submitted to the Standing Committee of the National People's Congress.