An NCO China Presentation: Tax Planning in China - Individual Income Tax

1. Tax Planning for Small and Medium Sized Enterprises in China

2. Individual Income Tax for Expatriates in China

3. Individual Income Tax for Expatriates in China Individual Income Tax (IIT) is determined by the expatriate’s: length of time stayed in China; source of income.

4. Individual Income Tax for Expatriates in China

5. Individual Income Tax for Expatriates in China An expatriate working for a Representative Office (RO) does not follow the 183-day rule.

6. Income Sources China Source Income: Income generated in China. Non-China Source Income: Income generated outside of China.

7. Income Sources China Source Income is: Income from service, employment and performance of contracts in China; Income from leasing property in China; Income from the assignment of property in China, e.g. buildings, land-use rights; Income from interests, dividends and bonuses from Chinese companies, commercial organizations or individuals in China.

8. Position Level Top management positions includes: General Manager; Deputy Manager; Director; Functional Positions; and Other management positions.

9. Reimbursements Exempt from IIT An expatriate’s income may be IIT exempted for reasonable reimbursements such as: Housing allowance, meal allowance and laundry expenses; Relocation allowance for employment or demission in China; Reasonable per diem expenses from business trip in and outside of China; Expenses reimbursements for home leave； Language training and education expenses.

10. Key Points About Declaring IIT(Employment Income) Employees have an obligation to pay IIT; Employers have an obligation to withhold IIT from employees; An employee’s taxable income is calculated by subtracting an allowed monthly deduction of RMB 4,800 from the monthly salary and wage; A progressive tax rate is applied to salaries and wages. The tax rate ranges from 5% to 45%; ITT is withheld by the employer and paid to the tax authorities before the 7th day of the following month.

11. Individual Income Tax Rates(Employment Income)

12. Calculating IIT(Employment Income) Individual Income Tax (IIT) Payable equals [Monthly Income – Monthly Deduction (RMB 4,800)] X Applicable Tax Rate – Quick Deduction Example A professor has a monthly salary of RMB20,000. The IIT payable is: Taxable Income = RMB 20,000 – RMB 4,800 = RMB 15,200 IIT Payable = RMB 15,200 X 20% - 375 = RMB 2,665

13. Key Points About Declaring IIT(Service Contract Income) A contractor’s taxable income is calculated by subtracting an allowed monthly deduction of: RMB 800 (if the service fee is less than RMB 4,000) or 20% of the service fee (if the service fee exceeds RMB 4,000) from the monthly contract service fee. A progressive tax rate is applied to contract service income. The tax rate ranges from 20% to 40%; Service contractors must paid IIT to the tax authorities before the 7th day of the following month.

14. Individual Income Tax Rates(Service Contract Income)

15. Calculating IIT(Service Contract Income) Individual Income Tax (IIT) Payable equals [Monthly Service Fee – Monthly Deduction Allowance] X Applicable Tax Rate – Quick Deduction Example A independent contractor receives a service fee of RMB 3,500 for services rendered in January. The IIT payable is: Monthly Deduction Allowance is RMB 800 as service fee is less than RMB 4,000. Taxable Income = RMB 3,500 – RMB 800 = RMB 2,700 IIT Payable = RMB 2,700 X 20% - 0 = RMB 540

16. Calculating IIT(Service Contract Income) Individual Income Tax (IIT) Payable equals [Monthly Service Fee – Monthly Deduction Allowance] X Applicable Tax Rate – Quick Deduction Example If the independent contractor received a service fee of RMB 30,000 for services rendered in February. The IIT payable is: Monthly Deduction Allowance is 20% of RMB 30,000 = RMB 6,000 Taxable Income = RMB 30,000 – RMB 6,000 = RMB 24,000 IIT Payable = RMB 24,000 X 30% - RMB 2,000 = RMB 5,200

17. Requirement to Declare IIT According to Individual Income Tax Law, an individual must declare IIT when they have: An annual income over RMB120,000 (this excludes individuals who have no residence in China and have lived in China for less than 1 year during a tax year); Salaries and wages from two or more companies in China; Earned taxable income that have not been withheld by an employer.

18. Annual Income over RMB 120,000 Annual income over RMB 120,000 within the tax year includes income from the following sources : Salaries and wages; Incomes from production and operation of a privately owned business; Incomes from contracts and leasing of enterprise and public institution; Service fees; Remuneration; Income from interests, dividends and bonus; Income from property leasing; Income from property transfer; Other.

19. Requirement to Declare IIT Expatriates with an annual income over RMB120,000 must declare and pay IIT to the tax authorities within three months after the tax year.

20. Tax Planning Tips If an Expatriate has resided in China for more than 5 years , their worldwide income is subject to IIT. An expatriate who has stayed in China for almost 5 years may break this 5 year residency rule if they stay 30 days outside of China on a single trip, or an accumulated period of 90 days in the calendar year. Expatriates should take advantage of the special tax calculation method for bonuses that are paid one-time during the year.

21. Tax Planning Tips Concept of FAPIAO and its relationship with tax preferential policy; Private car using for company； Social insurance; Commercial insurance; Expatriate working as part-time in China:

22. Contact Us NCO China tel: +86 (10) 8447 8118 fax: +86 (10) 8447 9349 e-mail: enquiry@ncochina.com website: www.ncochina.com