The Chinese government has recently released the draft amendments to the Individual Income Tax (“IIT”) Law to the public for consultation. The proposed amendments comprise broad changes to the IIT system and the salient proposed changes are as follows:

Definition of resident

The draft amendments introduce the internationally recognized “183-day” test for determining whether an individual is a Chinese tax resident, which will make it much easier for a non-China-domiciled individual to be considered a Chinese resident for tax purposes. According to the proposed changes, if a non-China-domiciled individual stays in China for 183 days or more (instead of a “full year” as defined under the existing system) in a calendar year, he/she is considered as a China tax resident who is subject to IIT on his/her China sourced and non-China sourced income. If he/she stays in China for less than 183 days, he/she is subject to IIT on his/her China sourced income, unless he/she is exempted from IIT under the relevant provision in a tax treaty (if applicable).

Tax categories, tax rates and brackets

According to the draft amendments, four categories of income (i.e., salaries and wages, remuneration for (independent) services, authors’ remuneration, and income from royalties) would be consolidated into a single new tax category called “comprehensive income”. Salaries and wages are currently subject to progressive tax rates ranging from 3% to 45%, with seven tax brackets. According to the proposed changes, the tax rates and seven tax brackets would remain and be applied to compute tax on comprehensive income. The lowest three tax brackets (i.e., 3%, 10%, and 20%) would be broadened considerably to benefit middle-/low-income earners.

Standard deduction

According to the draft amendments, the basic standard deduction that currently applies to salaries and wages would also apply to the new tax category comprehensive income and would be increased from RMB 3,500 per month to RMB 5,000 per month. The additional standard deduction of RMB 1,300 per month that currently applies to salaries and wages earned by foreign individuals working in China and China-domiciled individuals working overseas would be abolished.

Anti-avoidance rules

The draft amendments introduce anti-avoidance rules (similar to those that are applicable to enterprises for enterprise income tax purposes) which would allow the Chinese tax authorities to initiate tax adjustments and collect underpaid IIT with overdue interest in certain tax-avoidance situations.

The above new measures may come into effect on 1 January 2019, although some measures (e.g. the increased standard deduction) may be effective at an earlier date.


Contributed by: Masson de Morfontaine, Anthony Hung