News Feature – Tax changes for Businesses in China – LeYu

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LE YU CHINA – EUROPEFIDES – YEAR-END 2018 NEWSLETTER

For 2018, one key significant change in the Tax system of China is the reduction of VAT tax rate. Please read Part II below. Another key change to come is the change in the Individual Income Tax (IIT) system effective from 1st January 2019. This change in IIT system is deemed to increase the individual’s disposable income and stimulate China’s domestic consumption; as China has been structurally dependent on export-driven GDP growth. Significant within this IIT system change are the new definitions of Tax Residency and change into a yearly-taxation system concurrent with reduction in progressive rates. Certain details are yet-to-be released by the government; possibly because the government may need to seem how the new system pans out initially.

 

 

Part I:   New Individual Income Tax Update

 

The new Individual Income Tax Law will be effective from 1ST January 2019

 

The key changes:

1     Criteria for tax residency status

  • Resident taxpayer

Individuals with domicile in China, or without domicile in China with physical presence of no less than 183 days in China within one tax year.

  • Non-Resident taxpayer

Individuals without domicile in China and do not reside in China, or without domicile with physical presence in China of less than 183 days within one tax year.

 

2      Categories of Individual Income and Tax Rates 

S/N Categories Tax Rates
A Comprehensive Income: Income from wages and salaries, remuneration for personal services, manuscripts, royalties 3%-45%, 7 brackets of progressive tax rates
B Business Income 3%-35%, 5 brackets of progressive tax rates
C Income derived from interest dividends and bonuses, lease of property, transfer of property, Contingent Income 20%.

See appendix for Individual Income Tax Rate of Item A

 

For Item A, the Comprehensive Income, the individual income tax (IIT) shall be calculated on a consolidated basis for the tax year for resident taxpayer. But for non-resident taxpayer, it shall be calculated on a monthly basis or timely basis.

 For Item B and Item C, the income received by tax payer, the IIT shall be calculated respectively in accordance with the provisions of the law.

 

3     New Changes for Deductible Items

  • Resident taxpayer, for Comprehensive Income
    Standard basic deduction RMB 60,000 per year, statutory social securities, commercial health insurance RMB 2,400 per year.
    There are other newly-introduced deductible items that are not yet released by government; such as dependent education, continued-education, major illnesses medical expenses, mortgage interest, rental expenses and expenses for supporting the elderly.
  • Non-Resident taxpayer, for income from salary, wages: Standard basic deduction is RMB 5,000 per month.
  • Income derived from lease of property,
    Income is no more than RMB 4,000. The deduction is RMB 800. If the income is over RMB 4,000, the deduction is 20% of the income.
  • Income for remuneration from personal service, manuscripts and royalties,
    The deduction is 20% of the amount received.
    For remuneration from manuscripts, the taxable income in essence shall be 70% of the said balance between the amount received minus the 20% of the amount received.

 

Appendix

Individual Income Tax Rate

S/N Annual (monthly) taxable income (RMB) Tax Rate(%)
1 Not over 36,000 (Not over 3,000) 3
2 Over 36,000 to 144,000 (Over 3,000 to 12,000) 10
3 Over 144,000 to 300,000 (Over 12,000 to 25,000) 20
4 Over 300,000 to 420,000 (Over 25,000 to 35,000) 25
5 Over 420,000 to 660000 (Over 35,000 to 55,000) 30
6 Over 660,000 to 960,000 (Over 55,000 to 80,000) 35
7 Over 960,000 (Over 80,000) 45

 

Part II: VAT

 

From 1st May 2018, the new VAT tax rates were applied.

 

VAT tax rates are different according to different industrial sectors. Generally, the VAT rates are 16%, 10%, 6%, 5%, 3%, 0%. If the entity is a General VAT Tax Payer, the VAT output (VAT on Sales) can be offset with VAT input (VAT on Expenditure). (Prior to 1st May 2018, the most commonly applied VAT rate was 17%, which had since been reduced to 16%).

 

Surtaxes rates is different in different districts of a city and in different cities. Generally it is 7%, 5%, 1%, 3%, 2% of the VAT paid.