Individual Income Tax

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8 Individual Income Tax

TAXPAYERS

TAXABLE ITEMS, RATES, AND COMPUTATION

TAX REDUCTIONS AND EXEMPTIONS

TIME LIMIT AND PLACE FOR TAX PAYMENT

Levied on individuals, this tax has been adopted by administrations around the world. The Individual Income Tax Law of the People's Republic of China was passed at the Third Session of the 5th National People's Congress (NPC) on September 10, 1980, and became effective on that date. It was amended at the Fourth Session of the Standing Committee of the 8th NPC on October 31, 1993, for the first time, and at the Eleventh Session of the Standing Committee of the 9th NPC on August 30, 1999, for the second time. The Regulations for the Implementation of the Individual Income Tax Law of the People's Republic of China currently in force were promulgated by the State Council on January 28, 1994.

Individual Income Tax is administered respectively by the State Administration of Taxation (SAT) and the local tax bureaus. The revenue collected is shared between the Central Government and the local governments. In 2003, revenue from Individual Income Tax amounted to 141.73 billion yuan, accounting for about 7.0% of the country's total tax revenue.

TAXPAYERS

Main Categories

The taxpayers are the income earners, who can be divided into the two main groups.

Income from Sources Outside China

Individuals who have domicile in China, or individuals who, though without domicile in China, have resided in China for 1 year or more, shall pay tax on their worldwide income.

Where individuals not domiciled in China derive income from sources outside China, and where they have resided in China for a period of between 1 year and 5 years, they may, upon approval by the relevant tax department, pay tax on only the income paid by enterprises and other economic organizations or individuals within China.

Those individuals who have resided in China for more than 5 years in China should pay tax on all of their foreign income starting from the 6th year of their residence.

Income from Sources Within China

Individuals who are neither domiciled nor resident in China, and individuals who do not have domicile in China and who have been resident for less than 1 year in China, shall pay tax on only the income obtained from sources within China.

Where individuals have no domicile in China and where they have resided in China continuously or cumulatively for less than 90 days in 1 tax year, the portion of their income from sources within China that is paid by overseas employers and that is not borne by the employers' establishments/places in China shall be exempt from tax.

Terms Defined

  • Domicile: Individuals who have domicile in China are those who habitually reside in China for various reasons such as family registration administration, or family or economic interests.
  • Residence: Individuals who have resided in China for 365 days in 1 tax year are considered to have been resident in China for 1 year.

    Where the individuals make temporary trips out of China, the days spent outside China will not be deducted from the total count, where no single trip exceeds 30 days, or where the trips do not exceed 90 days on a cumulative basis within the same tax year.

  • Tax year: The tax year starts from January 1 and ends on December 31.

Income from Sources Outside China

Regardless of where the income was actually paid, the following income earned by taxpayers shall be regarded as originating from sources outside China:

  • Income derived from the provision of labor services outside China for post holding, employment, or convention performance
  • Income derived from the leasing of properties to lessees for use outside China.
  • Income derived from the transfer of buildings or land-use rights outside China, or of other properties outside China.
  • Income derived from permitting franchises to be used outside China.
  • Interest, dividends, and/or bonuses obtained from enterprises, or other economic organizations or individuals within China.

The portion of the income from outside China that is paid to units that post taxpayers abroad under prevailing rules may be deducted from the total income from outside China, after the tax authorities have examined the valid contracts or relevant vouchers provided by the taxpayers.

Income from Sources Within China

Regardless of where the income was actually paid, the following income earned by taxpayers shall be regarded as originating from sources within China:

  • Income derived from the provision of labor services within China for employment or convention performance.
  • Income derived from the leasing of properties to lessees for use within China.
  • Income derived from the transfer of buildings or land-use rights within China, or of other properties within China.
  • Income derived from franchises within China.
  • Interest, dividends, and/or bonuses obtained from enterprises, or other economic organizations or individuals within China.

TAXABLE ITEMS, RATES, AND COMPUTATION

There are 11 taxable categories, listed below:

  • Wages and salaries.
  • Income derived by individual industrial and commercial households from production/business operations.
  • Income derived from the contracted or leased operations of enterprises or institutions.
  • Remunerations from personal services.
  • Author's remunerations.
  • Royalties.
  • Interest, dividends, or bonuses.
  • Income derived from the lease of property.
  • Income derived from the transfer of property.
  • Contingent income.
  • Other income that is specified as taxable by the finance department of the State Council.

At present, revenue comes mainly from the tax levied on the following:

  • Wages and salaries.
  • Income derived by individual industrial and commercial households from production/business operations.
  • Interest earned on saving deposits.

The taxable scope, computation of taxable income, rates, and computation of tax payable for the various items listed above are discussed in the following sections.

Wages and Salaries

General Guidelines

What Constitutes Income Earned

Included in this category are wages, salaries, bonuses, year-end extras, profit shares, subsidies, allowances, and other income earned by individuals by virtue of employment.

Residences, cars, and/or computers bought by units for the individuals; rewards offered by units to marketing employees in the form of free travel; discounts or allowances provided by employers through the subscription of securities such as shares (where employees profit from the difference between the subscribing price and the issue price or the prevailing market price); and insurance premiums paid by units for their employees (excluding items specified as tax-exempt under prevailing rules) should also be accounted into the taxable income.

What Constitutes Taxable Income

Generally, the taxable income shall be the balance of monthly wages or salaries after the deduction of 800 yuan as expenses and other specified items (which at present include basic pension insurance, medical insurance, unemployment insurance, house reserves, and allowances for public affairs cars and communications).

Tax Rates

The tax payable shall be computed based on nine grades of progressive rates (see Table 8.1).

Table 8.1 Schedule 1 (Income from wages/salaries)
Grade Monthly taxable income Tax rate (%) Quick deduction (yuan)
1500 yuan or less50
2That portion of income over 500 yuan but not over 2,000 yuan1025
3That portion of income over 2,000 yuan but not over 5,000 yuan15125
4That portion of income over 5,000 yuan but not over 20,000 yuan20375
5That portion of income over 20,000 yuan but not over 40,000 yuan251,375
6That portion of income over 40,000 yuan but not over 60,000 yuan303,375
7That portion of income over 60,000 yuan but not over 80,000 yuan356,375
8That portion of income over 80,000 yuan but not over 100,000 yuan4010,375
9That portion of income over 100,000 yuan4515,375
Computing Tax Payable

In general, monthly tax payable is computed using the following formulas:

Monthly taxable income = Total monthly wages/salaries − 800 yuan − Other deductible items

Monthly tax payable = (Monthly taxable income × Applicable rate) − Quick deduction at each grade

Example

A clerk gets a monthly salary of 1,500 yuan, a bonus of 1,000 yuan, other taxable allowances of 300 yuan, and deductible social insurance expenses of 300 yuan.

Monthly taxable income = (1,500 + 1,000 + 300) − 800 − 300 yuan = 1,700 yuan

Monthly tax payable = (1,700 × 10%) − 25 = 145 yuan

Income from More Than One Source

Where an individual receives wages or salaries from more than one source, the income derived from all sources shall be aggregated.

Where individuals who have domicile in China, or who reside in China but do not have domicile in China, earn income from sources both within and outside China, tax should be computed and paid separately on the income from outside and inside China.

Additional Deduction

For taxpayers who have no domicile in China but who derive wages and salaries from sources within China, or who have domicile in China but derive wages and salaries from sources outside China, an additional deduction for expenses may be allowed, apart from the standard monthly deduction of 800 yuan and deductions for other specified items.

Average income levels, living standards, and exchange rate fluctuations shall be taken into consideration before this additional deduction is allowed.

The additional deduction now in effect is 3,200 yuan per month.

Taxpayers who have been granted the additional deduction should compute their tax payable using the following formula:

Taxable income = Monthly wages and salaries − 800 yuan − Additional deduction (3,200 yuan) − Other specified items

The following individuals are among those who may qualify for the additional deduction:

  • Foreign nationals working for enterprises with foreign investment and foreign enterprises in China.
  • Foreign experts hired to work for enterprises, institutions, social organizations, or government agencies in China.
  • Individuals who have domicile in China, and who derive income from wages and salaries by virtue of their tenure of an office or employment outside China.
  • Crew members of vessels that transport ocean-going shipments.
  • Other individuals as determined by the Ministry of Finance.

Overseas Chinese and compatriots from Hong Kong, Macao, and Taiwan shall be treated according to the principles outlined above.

Example

John is an American working for the office of a foreign enterprise in China. He earns a salary of 50,000 yuan per month. Deductible social insurance expenses amount to 5,000 yuan.

Monthly taxable income = 50,000 yuan − 800 yuan − 3,200 yuan − 5,000 yuan = 41,000 yuan

Monthly tax payable = (41,000 yuan × 30%) − 3,375 = 8,925 yuan

Allowances

Where allowances have been provided for public affairs cars and communications under the reformed public affairs car and communications system, the allowances shall be taxed as wages/salaries after the deduction of a certain level of public affairs expenses.

Allowances paid on a monthly basis should be included in the wages/salaries for the current month for computing the tax payable. Where they are not paid on a monthly basis, the amounts should be included in the wages/salaries for the relevant months.

Deduction levels for public affairs expenses shall be decided by the People's Government at the provincial level after taking into account local circumstances.

Tax Exemptions

No tax shall be levied on the allowances and subsidy difference not included in the total basic wages under the public servants wage system, or on allowances for business trips, meals, foodstuff for family members, the single child (based on China's one-child policy), or creche fees.

Lump-Sum Bonuses

Where bonuses are paid to employees in one lump sum by enterprises, institutional units, administrative units, or other withholding agents after factoring in various considerations (e.g., full-year economic growth; employee work performance; year-end salary increments; annual salaries and work performance-based wages paid according to methods outlined in rules governing annual salaries, performance, and efficiency wages), the bonus income should be deemed as income for 1 month for tax computation.

Computing Tax Payable

The tax withholding agents should compute the tax payable based on the following method:

  • Divide the full-year bonus figure by 12 to determine the 1-month equivalent.
  • Check the applicable tax rate and the quick deduction prescribed under Schedule 1 (see Table 8.1), and apply them to the quotient to determine the tax payable.

For each taxpayer, the procedure outlined above can be used only once each tax year.

Example

Mr Jiang's wages and bonuses amount to 2,000 3,000 yuan each month, and he has prepaid the tax. At the year-end, he obtains a lump-sum bonus of 9,600 yuan. The applicable tax rate is 10% and the quick deduction is 25 yuan.

1-month equivalent = 9,600 yuan ÷ 12 = 800 yuan

Tax payable = (9,600 yuan × 10%) − 25 yuan = 935 yuan

Where the wages/salaries for the month in which the lump-sum bonus is paid are lower than the deduction for expenses specified by tax laws, the balance should be deducted from the bonus first. Then, the method outlined above should be applied to the remaining portion.

Example

Mr Lin earns wages/salaries of 700 yuan each month. The figure falls short of the statutory deduction of 800 yuan by 100 yuan. At the year-end, he gets a lump-sum bonus of 1,600 yuan. The applicable tax rate is 5% and the quick deduction is 0.

1-month equivalent = (1,600 yuan − 100 yuan) ÷ 12 = 125 yuan

Tax payable = 125 yuan × 5% = 6.25 yuan

Severance Pay

Where severance pay has been given to employees who have not reached retirement age, but who have left their jobs in accordance with prevailing rules because they have lost their ability to work due to industrial injuries or diseases, the portion of the severance pay not exceeding 40% of the previous wages/salaries may be exempt from tax. The remaining portion should be taxed as per normal.

Severance pay received by employees in other situations should be taxed as wages/salaries.

Economic Compensation for Termination

Economic compensation paid in lump sums (including economic compensation, living allowances, and other allowances) to individuals whose work contracts have been terminated shall be taxed as wages/salaries.

The tax shall be withheld by the payers at the time the compensation is paid.

As such payments may be large, and as the individuals may not have any regular income for some time, the portion not exceeding 3 times the local average wages in the previous year may be exempt from tax. The remaining portion may be taxed as wages/salaries for several months, and the individuals shall be allowed to be reschedule the tax payments for a certain period of time.

The following computation method shall be applied:

  • Divide the compensation income by the number of years that the employee has worked in the enterprise (maximum: 12).
  • Treat the quotient as monthly wages/salaries to compute the tax payable.
Deductible Items

The following items may be deductible where they are paid in accordance with prevailing rules:

Production/Business Income of Individual Industrial/Commercial Households

General Guidelines

What Constitutes Income Earned

The following items can be classified as income derived from the production/business operations of individual industrial/commercial households (hereafter referred to as individual households):

  • Income derived by individual households from engagement in industry, handicrafts, construction, transportation, commerce, catering, services, repairs, and production and business in other industries.
  • Income derived by individuals from engagement in the provision of educational, medical, advisory, or other services activities for which fees are charged, after approval from the relevant government departments and obtaining the licenses.
  • Other income derived by individuals from engagement in individual industrial/commercial production/business.
  • All taxable income related to the production/business operations of the individual households and individuals discussed above.

Income from agricultural activities may also be subject to tax under this category.

  • Plantation, breeding, feeding, fisheries: Where individual households and individuals are solely engaged in plantation, breeding, feeding, or fisheries, and whose operational items do not fall within the scope of Agriculture Tax or Animal Husbandry Tax, their income shall be subject to Individual Income Tax.

    Those concurrently engaged in these industries should pay tax in reference to the specialised households if they separately account for each industry. Otherwise, all of their income should be taxed under Individual Income Tax.

What Constitutes Taxable Income

The taxable income shall be the balance of the gross annual revenue derived from production/business after the deduction of matching costs, expenses and/or losses. Revenue and income are realized on an accrual basis.

  • Gross revenue: Sales revenue; business operation revenue; service remunerations; project proceeds; income from the leasing or transfer of properties; interest; other business revenue and non-business revenue.
  • Costs, expenses: Various direct expenditures and overheads allocated under costs; sales expenses; administrative expenses; financial expenses.
  • Losses: Various non-business expenditures.
  • Deductible items/levels: To be determined in accordance with relevant tax laws, regulations and rules.
Tax Rates

Tax payable shall be based on the taxable income and subject to five progressive rates under Schedule 2 (see Table 8.2).

Computing Tax Payable

Annual tax payable is computed using the following formulas:

Taxable income = Annual gross revenue from production and operation − Costs, expenses, and losses

Tax payable = (Taxable income × Applicable rate) − Quick deduction

Table 8.2 Schedule 2 (Income of individual households/enterprises/units from contracted business/leasing operations)
Grade Annual taxable income Tax rate (%) Quick deduction (yuan)
1Income of 5,000 yuan or less50
2That portion of income over 5,000 but not over 10,000 yuan10250
3That portion of income over 10,000 but not over 30,000 yuan201,250
4That portion of income over 30,000 but not over 50,000 yuan254,250
5That portion of income over 50,000 yuan356,750

Example

An individual household earns revenue of 600,000 yuan from business operations for the tax year. The cost and expenses are 500,000 yuan. The income tax payable shall be computed as follows:

Taxable income = 600,000 yuan − 500,000 yuan = 100,000 yuan

Tax payable = (100,000 × 35%) − 6,750 = 28,250 yuan

Income from More Than One Source

Where individual households obtain production/business income from more than one source, they should aggregate their income for tax computation and payment.

Losses Carried Forward

Losses incurred by taxpayers may be carried forward for offsetting against the business income for the following year, after examination by the relevant tax department.

Where the business income for the following year is not enough to offset the losses, the losses may be carried forward to subsequent years (maximum: 5).

The specific method is the same as that used for Enterprise Income Tax (see Chapter 6: Enterprise Income Tax under the section on tax computation methods).

Collection by Assessment

Where taxpayers are unable to provide complete and accurate tax payment documents or to correctly compute the taxable income, the relevant tax department shall assess the taxable income for them.

Income Taxable Under Other Categories
  • Joint operations: Profits derived by individual households from joint operations with enterprises shall not be taxed as production/business income. Instead, they shall be taxed in line with dividends, interests, and bonuses.

Deductible Items

The levels for expense deductions for business owners and for wage deductions for employees shall be determined by the local tax bureaus at the provincial level after considering local conditions and practical needs, and the records submitted to the SAT.

The wages of the owners are not deductible.

Where expenses for production/business operations are mixed up with family expenditure, the relevant tax department shall assess the allocation ratio, on the basis of which allowable deductions shall be computed for such expenses.

Organization Expenses

Expenses incurred during the period from the application for a business license to the commencement of production/business operations may be treated as organization expenses, and may be allocated for deductions scheduled over a minimum of 5 years, starting from the date that production/business operations commence.

Interest Paid on Borrowings

Where the taxpayers pay interest on borrowings obtained in the course of production/business operations, deductions may be granted for the portion of the interest paid that does not exceed the interest that would be payable on loans of the same type and term based on the rate prescribed by the People's Bank of China.

Expenses on Consumables

Expenditure on consumable articles of low value should in principle be deducted at one time.

However, where the value of any single purchase is high, the expenditures should be amortized. The period and levels shall be determined by the local tax bureaus at the provincial level.

Insurance-Related Expenses

Expenses on property and transportation insurance related to production/business operations, and expenses on pension and medical insurance for employees shall be deducted in accordance with the relevant State rules.

Repair Expenses

Repair expenses related to production/business operations may be fully deductible.

Repair expenses incurred up and down, or that are large should be amortized. The period and levels shall be determined by the local tax bureaus at the provincial level.

Business Reception Expenses

Reception expenses related to production/business operations may be deducted at a rate of 5% of gross revenue, after the taxpayers have provided legitimate vouchers and the relevant tax department has examined them.

Development Expenses

Where taxpayers incur expenses on the research and development of new products, new technology or new crafts, or on the acquisition of measurement equipment and test installations valued at less than 50,000 yuan for the research and development of new products or new technology, the expenses may be deducted in full.

Various Taxes, Surcharges, Fees, Dues

The following items may be deductible in full, if they are paid based on prevailing rules:

  • Consumption Tax, Business Tax, Resource Tax, City and Township Land Use Tax, City Maintenance and Construction Tax, Farmland Occupation Tax, Land Appreciation Tax, House Property Tax, Vehicle and Vessel Usage Tax, Stamp Tax.
  • Educational surcharges.
  • Industrial/commercial administrative fees.
  • Society dues of individual householders.
  • Charges for vendor's stands.

What items are deductible and which deduction levels shall apply to other fees paid shall be determined by the local tax bureaus at the provincial level based on local conditions.

Unrecoverable Receivables

Such expenses related to production/business operations may be deductible, after the taxpayers have provided valid documents and the relevant tax department has examined them.

Those recovered in later years should be included in the income. Receivables recovered later should be included in the taxable income for the year in which they are recovered.

Inventory Losses

Net damages and losses sustained in the inventory of fixed or current assets in the course of production/business operations may be deducted for the current period, after the relevant tax department has examined the inventory documentation.

Foreign-Exchange Gains/Losses

Where taxpayers have to convert foreign currencies into yuan to make settlements in the course of production/business operations, and exchange rate fluctuations result in gains/losses, these gains/losses shall be treated as foreign-exchange gains/losses.

Losses shall be deducted from the taxable income for the period; gains shall be included.

Non-Deductible Items

The following expenses are not deductible for individual households:

  • Capital expenses.
  • Properties confiscated or fines paid.
  • Individual Income Tax paid, or interest or fines paid for the late payment of taxes.
  • Expenses of financial support (unless otherwise stipulated by the State).
  • The compensated portion of losses resulting from natural disasters or accidents.
  • Dividends distributed to investors.
  • Private or family expenses.
  • Other expenses not related to production/business operations.
  • Other expenses specified as not being deductible by the SAT.

Fixed Assets

The following items may be classified as fixed assets:

  • Houses and buildings.
  • Machinery, equipment, transportation tools, and other production- or business-related equipment.
  • Tools and appliances whose unit values exceed 1,000 yuan, and that are used for more than 1 year in production or business operations.
Valuation Principles

Assets should be valued based on the following principles:

  • Assets purchased: Based on the purchasing price, packaging charges, freight charges, and installation charges actually paid.
  • Assets self-constructed: Based on the total expenses incurred during construction.
  • Assets for investment: At the appraised value or the value agreed upon in the contracts (agreements).
  • Assets re-constructed or expanded: At the original book value less the price fluctuation during the re-construction or expansion, plus expenses incurred in the course of re-construction or expansion.
  • Assets with inventory gains: Based on the complete appraised value of similar assets.
  • Assets rented from others by financial leasing: Based on the rental charges, freight charges, insurance premiums, and installation and test charges, as determined by the leasing agreements or contracts.
Depreciation Principles

Depreciation may be allowed for the following items:

  • Houses and buildings.
  • Machinery and equipment in use.
  • Apparatus or measuring equipment.
  • Tools and appliances.
  • Equipment whose use has been suspended for seasonal reasons or repair.
  • Assets leased from others by way of business operations.
  • Assets rented by way of financial leasing.

No depreciation shall be allowed for the following items:

  • Assets not in use or not needed (excluding houses and buildings).
  • Assets rented by way of business operations. However, the rental charges may be deductible.
  • Assets still in use after they have been fully depreciated.

Before computing depreciation, the taxpayers should estimate the salvage value and deduct it from the original value of the assets. The salvage value is determined at 5% of the original price of the assets.

Depreciation Period

When selecting the depreciation period for their assets, taxpayers shall follow the guidelines prescribed below for determining the useful life of the assets, after the relevant tax department has examined the assets:

  • Houses and buildings: Not less than 20 years.
  • Steamships, machinery, apparatus, and other production equipment: Not less than 10 years.
  • Electrical equipment, transportation tools (excluding steamships), production- or business-related tools, appliances, and furniture: Not less than 5 years.

Where the taxpayers need to shorten the depreciation period, they may apply for approval from the local tax bureaus at the provincial level in the locales where they are situated.

Depreciation Methods

Depreciation shall be computed using the straight-line method or the units-of-output method. For details, refer to Chapter 6: Enterprise Income Tax under the section on tax computation methods.

Intangible Assets

Valuation Principles

Assets should be valued based on the following guidelines:

  • Assets for investment: Based on the reasonable price agreed upon in the contracts (agreements).
  • Assets purchased: Based on the actual payment.
  • Assets received as gifts: Based on the price stated in the receipt, or on the market price of similar assets.

The value of non-patent technology and goodwill should be determined after appraisal by authorized appraisal organizations.

Amortization Principles

When amortizing their assets, taxpayers should follow the guidelines outlined below:

  • Assets for production/business: Assets used in the course of production/business operations may be amortized over their useful life, starting from the date they are put into use.
  • Assets for investment or received by transfer: Such assets may be amortized over the useful life specified by law or in the contracts (agreements).
  • Assets without a specified useful life: Such assets should be amortized over a period of no less than 10 years.
  • Assets self-developed: Such assets should be amortized over a period of no less than 10 years.

Production/Business Income of Single Proprietorships/Partnerships

General Guidelines

What Constitutes Income Earned

Income earned from production/business operations by investors of single proprietorship enterprises (hereafter referred to single proprietorships) and partnership enterprises (hereafter referred to as partnerships) shall be subject to tax based in the same manner as income earned from production/business operations by individual industrial/commercial household enterprises.

The production/business income of single proprietorships/partnerships refers to the balance of gross annual revenue earned after deductions for matching costs, expenses, and losses.

Gross income refers to the income derived from production/business operations or from activities related to production/business operations. Such income includes revenue from the sale of commodities (products), transportation charges, services income, project income, income from the leasing or transfer of property, interest income, other business income, and income beyond business.

Some special instances are discussed below:

  • Liquidation income: Enterprises under liquidation are still subject to tax. Where the balance of the public value of all fixed assets and property after deductions for liquidation expenses, losses, debts, and retained profits for the year preceding the liquidation, exceeds the paid-in capital of the enterprise, the excess portion should be regarded as the production/business income for tax computation.

    Investors entering liquidation should settle their tax liabilities with the tax authorities before de-registering with the Industrial and Commercial Administration Department.

  • “Distribution of profits:” Where single proprietorships, partnerships, or individual investors use the funds of the enterprises to buy cars or houses, or spend the funds on consumption items not related to production/business operations, for themselves, their family members or relevant persons, the expenditure shall be deemed to be distribution of profits to the individual investors.

    As a result, the investors should include it in their income from production/business operations for tax computation.

What Constitutes Taxable Income
  • Single proprietorships: The taxpayers are the investors. Their taxable income is the total income earned from production/business operations by the enterprises.
  • Partnerships: The taxpayers are the partners. Their taxable income is based on the total income earned from production/business operations, and on the sharing proportions agreed upon in the partnership contracts. Where the contracts do not specify the sharing proportion, the taxable income for each partner shall be the total income divided by the number of partners.
Abbreviated Tax Years

Where a business operates for less than 12 months in a tax year because the enterprises started the business at some point during the year, or underwent mergers or shutdowns during the year, the period during which business operations were actually conducted shall be taken as 1 tax year.

Losses
  • Carry forwards: Losses for the current tax year may be offset against the income from production/business operations for the following tax year.

    Where the income for the following year is not sufficient to offset the losses, the excess portion may be carried forward again, for a maximum of 5 years. For details, refer to Chapter 6: Enterprise Income Tax under the section on tax computation methods.

  • Change in payment method: Where single proprietorships/partnerships change their tax payment method from self-reporting to administrative assessment, the remainder of the losses as stated in the taxpayers' self-reporting returns cannot be used for further offsets.
  • Two or more enterprises: Where the investors run two or more enterprises, annual losses incurred by the enterprises cannot be offset across the enterprises.
Associated Enterprises

Where the single proprietorships/partnerships have transactions with associated enterprises, the single proprietorships/partnerships should charge prices or pay expenses in the same manner as with independent enterprises.

Where any prices paid or expenses charged are not in line with those for independent enterprises and the taxable income is reduced as a result, the relevant tax authorities shall have the power to make reasonable adjustments.

Two or More Enterprises

Where the investors run two or more enterprises (including participating in the management of the enterprises), the investors should at the year-end consolidate the taxable income from all the enterprises for tax computation.

Income Taxable Under Other Categories
  • Income from outward investment: Interest, dividend, or bonus income earned by single proprietorships/partnerships from outward investment should not be included in the income of the enterprises. Instead, it should be treated separately as the individual income of the investors, on which Individual Income Tax is payable.

    Interest, dividend, or bonus income earned from outward investment made in the name of partnerships should be divided between the investors in line with rules governing the computation of taxable income for partnerships. It should be treated separately as the individual income of the investors, on which Individual Income Tax is payable.

Self-Reporting

In general, where single proprietorships/partnerships adopt the self-reporting method for tax collection, their production/business income shall be determined in the same manner as for individual industrial/commercial households. Some exceptions and special instances are discussed below.

Determination of Deduction Levels

Deduction levels for the investors shall be determined by the local tax bureaus at the provincial level in the same manner as for wage/salary income.

The wages/salaries of the investors are not allowed for deductions before tax.

Deductions for Two or More Enterprises

Where investors operate two or more enterprises, the investors should pre-select the enterprises from whose production/business income they wish to deduct individual expenses allowable for deductions.

Depreciation Deductions for Assets in Common Use

Where fixed assets are used for the production/business operations of the enterprises, as well as by the investors or their families, the relevant tax authorities shall assess the amount or percentage of the depreciation allowable for deduction by considering the type and the size of the production/business operations.

Deductible Items
  • Wage/salary expenses: Expenses incurred on employee wages/salaries may be deducted in accordance with rules that shall be determined by the local tax bureaus at the provincial level along principles applied to deductible wages/salaries as stipulated for Enterprise Income Tax.
  • Other employee-related expenses: Worker's union expenses, employee welfare expenses, and employee education expenses can be deducted on an actual basis, up to a maximum of 2%, 14%, and 1.5%, respectively.
  • Advertising/propaganda expenses: For such expenses incurred within 1 tax year, the portion amounting to less than 2% of the total sales (business) revenue may be deducted on an actual basis; the excess portion may be carried forward without any time limit.
  • Business reception expenses: Such expenses directly related to production/business operations may be deducted up to the following limits: 0.5% of the net sales (business) revenue if the total annual net revenue does not exceed 15 million yuan; 0.3% if the total annual net revenue exceeds 15 million yuan.
Non-Deductible Items
  • Living expenses: Such expenses incurred by the investors and their families are not allowed for deduction.

    Where it is hard to separate the living expenses of the investors and their families from expenses on production/business operations, all the expenses in question shall be deemed to be living expenses, and shall not be allowed for deduction.

  • Provisions drawn: Various provisions drawn by the enterprises are not allowed for deduction.

Administrative Assessment

The tax authorities may impose the administrative assessment method of collection and levy Individual Income Tax on the single proprietorships/partnership enterprises if any of the following scenarios applies:

  • The enterprises have set up accounting records, but not in accordance with the relevant State rules.
  • The enterprises have set up accounting records, but the records are confusing, or the materials documenting the costs, revenue and/or expenses are so incomplete as to make an audit difficult to conduct.
  • The taxpayers liable for tax fail to complete tax reports within the statutory time limit, and fail again to file tax returns even after the tax authorities order them to do so within a specified time limit.

Investors under administrative assessment shall not be eligible for preferential policies under Individual Income Tax.

The administrative assessment mode includes collection by fixed amount, collection by assessing the taxable income rate, and collection by other reasonable methods.

Tax Rates

Taxable income rates vary by sector:

  • Industry, commerce, transportation and traffic: 5%–20%.
  • Construction and realty development: 7%–20%.
  • Catering services: 7%–25%.
  • Entertainment: 20%–40%.
  • Other sectors: 10%–30%. The rate shall not be lower than 25% for lawyer's firms, accounting firms, auditor's firms, and other intermediary institutions.

Where the enterprises are engaged in multiple sectors, the taxable income rate shall be determined based on the key sector, regardless of whether the enterprises carry out separate accounting for different sectors.

Computing Tax Payable

Where collection by assessing the taxable income rate is adopted, the following formulas are used to compute the tax payable:

Tax payable = (Taxable income × Applicable tax rate) − Quick deduction

Taxable income = Total revenue × Taxable income rate

Or

Taxable income = Costs and expenses ÷ (1 − Taxable income rate) × Taxable income rate

Example

An enterprise books income of 1 million yuan for the current year. The taxable income rate assessed by the local tax authorities is 10%. The Enterprise Income Tax payable is computed in the following manner:

Taxable income = 1 million yuan × 10% = 100,000 yuan

Tax payable = (100,000 yuan × 35%) − 6,750 yuan = 28,250 yuan

Example

An enterprise has costs and expenses of 170,000 yuan for the current year. The taxable income rate assessed by the local tax authorities is 15%.

Taxable income = {170,000 yuan ÷ (1 − 15%)} × 15% = 30,000 yuan

Tax payable = (30,000 yuan × 20%) − 1,250 yuan = 4,750 yuan

Income from Contracted/Leased Operations of Enterprises/Institutions

General Guidelines

What Constitutes Income Earned

Income from the contracted/leased operations of enterprises/institutions refers to income derived by individuals from contracted/leased operations, or from sub-contracts/sub-leases.

Also included are income in the form of profits shared as stipulated by the business contracts, and income of a wage/salary nature.

Computing Tax Payable

The taxable income is the balance of the total income for the tax year after deductions for necessary expenses. The current allowable amount is 800 yuan per month.

The tax payable shall be computed in accordance with Schedule 2 (see Table 8.2).

Example

A contractor has derived income of 100,000 yuan from contracted operations. The deductible expenses allowed are 9,600 yuan (800 yuan × 12).

Annual taxable income = 100,000 yuan − 9,600 yuan = 90,400 yuan

Annual tax payable = (90,400 yuan × 35%) − 6,750 yuan = 24,890 yuan

Income from More Than One Place

Where individuals receive income from contracted operations from more than one place, they should aggregate the income derived from all sources for tax computation.

Ownership of Achievements

Where the contractors/lessees own all achievement from the business operations by simply paying some charges to the principals/lessors as stipulated by the contracts (agreements), tax shall be paid on the basis of the achievements.

Where the contractors/lessees receive only a certain income but do not own the achievements of the business operations as stipulated by the contracts (agreements), tax shall be paid on wages/salaries.

Income from Remunerations, Labor Services, Royalties, Property Leasing

General Guidelines

Computing Tax Payable

Income from remunerations, labor services, royalties, and property leasing are taxed based on the income received in each instance.

Where the income received in each instance is less than 4,000 yuan, the deduction shall be 800 yuan. Where it exceeds 4,000 yuan, the deduction shall be computed at a 20% rate. The balance of the income shall be the taxable income.

The tax payable shall be computed at a 20% rate.

Tax payable = Taxable income × 20%

Taxable income = Taxable items − 800 yuan

Or

Taxable income = Taxable items × 20%

Income from Personal Services

What Constitutes Income Earned

Income from remunerations for personal services includes income derived by individuals from designing, decoration, installation, drafting, laboratory testing, other testing, medical treatment, legal services, accounting services, advisory services, lecturing, news broadcasting, translation, proofreading, painting or calligraphy, carving, flashing pictures and television, sound recording, video recording, shows, performances, advertising, exhibition and technical services, introduction services, brokerage services, agency services, and other personal services.

Rewards offered by units to the non-employee marketing staff in the form of free travel and director's fees obtained by virtue of holding a directorship are also treated as income.

In the case of income for solely one payment, the payment shall be one income. In case of several payments made for one project, the monthly payment shall be one income.

Tax Deductions

In addition to expenses allowed for deduction under tax laws, the intermediary charges paid by taxpayers when providing personal services may be deducted, where valid certification or documentation can be provided.

Example

An engineer has received simultaneously one payment of 20,000 yuan from company A for designing, and one payment of 2,000 yuan from company B for advisory services.

The tax payable on the payment for designing services received from company A is calculated in the following manner:

Taxable income = 20,000 yuan − (20,000 yuan × 20%) = 16,000 yuan

Tax payable = 16,000 yuan × 20% = 3,200 yuan

The tax payable on the payment for advisory services received from company B is calculated in the following manner:

Taxable income = 2,000 yuan − 800 yuan = 1,200 yuan

Tax payable = 1,200 yuan × 20% = 240 yuan

The total tax payable is computed by adding the tax payable on the income received from company A and the tax payable on the income received from company B

Total tax payable = 3,200 yuan + 240 yuan = 3,440 yuan

Example

A worker is engaged in installation services for 1 month and receives 3,000 yuan.

Taxable income = 3,000 yuan − 800 yuan = 2,200 yuan

Tax payable = 2,200 yuan × 20% = 440 yuan

Additional Tax

Where any single payment received as remuneration for personal services is excessively high, tax laws permit an additional tax to be levied on the income.

Not only shall the income be subject to Individual Income Tax, but also, the portion of the income between 20,000 yuan and 50,000 yuan shall be subject to tax amounting to 50% of the Individual Income Tax payable on that portion.

The portion of income exceeding 50,000 yuan shall be subject to an additional tax amounting to 100% of the tax payable on that portion.

Example

An actor receives 60,000 yuan for a performance.

Taxable income = 60,000 yuan − (60,000 yuan × 20%) = 48,000 yuan

Regular tax payable = 48,000 yuan × 20% = 9,600 yuan

Additional tax payable = (48,000 yuan − 20,000 yuan) × 20% × 50% = 2,800 yuan

Total tax payable = 9,600 yuan = 2,800 yuan = 12,400 yuan

Computing Tax Payable

Individual Income Tax may be computed based on taxable income and the three-grade progressive rates (see Table 8.3).

Example

Take the case of the actor in the previous example.

Tax payable = (Taxable income of the year × Applicable rate) − Quick deduction = (48,000 yuan × 30%) − 2,000 yuan = 12,400 yuan

Income from Author's Remunerations

What Constitutes Income Earned

Income from author's remunerations includes all income derived by individuals by virtue of the publication of their works (including written works, painting and calligraphy works, photographic works, and other works) in books, newspapers, and periodicals.

Table 8.3 Schedule 3 (Income from remuneration for services)
Grade Taxable income Tax rate (%) Quick deduction (yuan)
1Portion not over 20,000 yuan200
2Portion between 20,000 yuan and 50,000 yuan302,000
3Portion over 50,000 yuan407,000

Such income shall be subject to tax each time the works are published.

Each time an author publishes the same works, regardless of whether the publishing units are prepaying the remuneration, paying in several portions, or paying the remuneration after reprinting, all the income from remunerations relating to the author's works shall be treated as one payment for tax assessment purposes.

Where the author publishes his works in several publishing places, or re-publishes his works, the income derived from each place of publication may be treated as separate payments of remuneration for tax assessment purposes.

Income Taxable Under Other Categories
  • Deceased authors: Remunerations for deceased authors shall be included in the taxable income of the individuals receiving the remunerations for the computation of Individual Income Tax.
  • Newspapers/magazines: Income derived by reporters, editors, and other professionals holding positions in or hired by newspaper or magazine units, from publishing works in the newspapers or magazines of their units, shall be included in the wages for the month in which the works are published for the computation of Individual Income Tax under the wage/salary classification.
  • Auctions: Income from auctions of an author's written works shall not be taxed as author's remuneration income under Individual Income Tax, but as royalty income.
Tax Reductions

Under tax laws, the Individual Income Tax actually payable may be reduced by 30% of the tax on the taxable income from author's remunerations.

Example

An author receives one payment for remuneration of 30,000 yuan on his works.

Taxable income = 30,000 yuan − (30,000 yuan × 20%) = 24,000 yuan

Statutory tax payable = 24,000 yuan × 20% = 4,800 yuan

Statutory tax reduction amount = 4,800 yuan × 30% = 1,440 yuan

Actual Individual Income Tax payable = 4,800 yuan − 1,440 yuan = 3,360 yuan

Income from Royalties

What Constitutes Income Earned

Income from royalties includes income derived by individuals from the provision of use rights for patents, trademark rights, copyrights, non-patented technology, and other licensing rights.

Each payment shall be subject to tax. Each time that permission is granted to use one right, shall be counted as one instance of payment.

Tax Deductions

In addition to deductions allowed by tax laws, intermediary commissions or charges paid by taxpayers when transferring technology may be deducted as long as valid certification or documentation can be provided.

Example

A professor provides the use right for his patent to a company and receives 1 payment of 50,000 yuan

Taxable income = 50,000 yuan − (50,000 yuan × 20%) = 40,000 yuan

Tax payable = 40,000 yuan × 20% = 8,000 yuan

Income from Property Leasing

What Constitutes Income Earned

Income from the leasing of property includes income derived by individuals from the leasing of buildings, land-use rights, machinery, equipment, vehicles, vessels, and other property.

Tax shall be computed based on the total amount of leasing income received within 1 month.

Tax Deductions

In addition to deductions allowed by tax laws, various taxes, and education surtax paid in the course of leasing the property may, upon the provision of tax completion (payment) receipts, be deducted from the total income from leasing.

Furthermore, maintenance and repair expenses borne by the taxpayers may, upon the provision of valid certifications, be deducted. The deductible amount shall be limited to 800 yuan each time. The excess, if any, may be carried forward to the next instance.

Example

A citizen leases his own house to another person for business, and receives rental income of 6,500 yuan for the current month. Expenses (taxes, educational surcharge, repair expenses) amount to 1,500 yuan.

Taxable income = (6,500 yuan − 1,500 yuan) × (1 − 20%) = 4,000 yuan

Tax payable = 4,000 yuan × 20% = 800 yuan

Income from Transfers of Property

General Guidelines

What Constitutes Income Earned

Income from the transfer of property includes income derived by individuals from the transfer of negotiable securities, share rights, buildings, land-use rights, machinery, equipment, vehicles and vessels, and other properties.

Income from certain other activities may also be subject to tax under this category.

  • Auctions: Income earned from auctions of paintings, calligraphy, or antiques by individuals should be taxed as property transfer income.
What Constitutes Taxable Income

Taxable income shall be the balance of the gross proceeds received from the property transfer after the original value of the property and reasonable expenses have been deducted.

The applicable tax rate is 20%.

Valuation Principles

The original value of the property being transferred should be computed in the following manner:

  • Negotiable securities: Based on the subscription price plus fees paid in accordance with rules governing such securities.
  • Buildings: Based on the construction costs or acquisition price plus other relevant expenses.
  • Land: Based on the payments made for obtaining the land-use rights, land development expenses, and other relevant expenses related to the land-use rights.
  • Machinery, equipment, vehicles, vessels: Based on the purchase price plus freight, installation charges and other relevant expenses.
  • Other properties: Valuation should be carried out with reference to the principles outlined above.

Where taxpayers are unable to provide complete and accurate documents to corroborate the original value of their properties, or are unable to compute the original value correctly, the relevant tax department shall assess the original value for them.

Computing Tax Payable

Tax payable on property transfers is computed in the following manner:

Taxable income = Gross proceeds from transfer of property − Original value of property − Reasonable expenses Tax payable = Taxable income × 20%

Example

A person sells a house with an original value of 200,000 yuan and receives 400,000 yuan for the sale. Taxes paid and expenses related to the sale amount to 80,000 yuan.

Taxable income = 400,000 yuan − 200,000 yuan − 80,000 yuan = 120,000 yuan

Income tax payable = 120,000 yuan × 20% = 24,000 yuan

Interest, Dividends, Bonuses, Contingent Income, and/or Other Income

General Guidelines

What Constitutes Income Earned
  • Interest, dividends, bonuses: Income from interest (including interest on saving deposits, loans and bonds), dividends, and bonuses refers to the interest, dividends, and bonuses derived from ownership of credits and share rights.
  • Income treated as dividends:

    Where investors of enterprises other than single proprietorships/partnerships use the funds of the enterprises to pay expenses not related to production/business operations, or buy cars or houses for themselves, their family members, or other relevant persons, the expenditure shall be deemed to be profit distribution to the investors, and shall be taxed as dividend income.

    Where the investors borrow money from their enterprises (other than single proprietorships/partnerships) within the tax year, and fail to return the borrowings at the year-end, or fail to use them for production/business operations during the year, the borrowings not paid back shall be deemed to be profit distribution to the investors, and shall be subject to Individual Income Tax.

  • Contingent income: Such income includes prizes awarded to individuals, prizes won by individuals, lotteries won by individuals, and other income obtained unexpectedly (such as the awards given previously for outstanding contributions by the People's Government below the provincial level or their various departments.
  • Other income: This refers to income specified by the financial department of the State Council as taxable, apart from those listed as taxable under the Individual Income Tax Law.

    For example, the SAT rules that income earned by individuals from payments in cash, in kind and/or in securities made by some units due to year-end work appraisals, various celebrations, business exchanges and other activities, should be treated as other income and subject to Individual Income Tax, which shall be withheld by the paying units.

    Awarded income received by individuals whose employers have paid their insurance premiums and to whom no indemnity has ever been paid, and discount income and commission rebate income received from securities companies shall also be taxed as other income.

What Constitutes Taxable Income

Taxable income shall be the full amount received in each payment, and the applicable tax rate shall be 20%.

Where joint equity enterprises pay dividends in the form of shares, the face value of the shares should be used for tax computation.

Computing Tax Payable

To compute the tax payable, taxpayers should use the formula provided below:

Tax payable = Full amount in each payment × 20%

Example

A person receives dividends of 6,000 yuan in one payment.

Tax payable = 6,000 yuan × 20% = 1,200 yuan

Example

A person wins 200,000 yuan from the social welfare lottery.

Tax payable = 200,000 yuan × 20% = 40,000 yuan

Example

The accountant of a company was cited as a model in tax payment matters by the tax department at the year-end and received 3,000 yuan as his prize.

Tax payable = 3,000 yuan × 20% = 600 yuan

Grassroots Supply Houses, Countryside Credit Enterprises

Whether tax shall be levied on interest, dividends, or bonuses received by individuals from grassroots supply houses or countryside credit enterprises (excluding interest on saving deposits held with the countryside credit enterprises), shall be determined by the People's Government at the provincial level after considering local conditions.

Donation Income

General Guidelines

Tax Deductions

Where individuals donate their income, through social organizations or government agencies in China, to public welfare undertakings, or to disaster-hit or poverty areas, that portion of the donations amounting to less than 30% of their taxable income may be deducted.

Full deductions may be granted where the donations are made to education causes, the Red Cross, public venues for teenagers, welfare institutions and non-profit organizations that offer services for the aged, the Song Qingling Fund, the China Poverty Support Fund, the China Handicapped Welfare Fund, the China Law Assistance Fund, the China Mining Lung Disease Fund, the China Hero Fund, the China Health Express Fund, the China Environment Protection Fund, the Sun Yefang Economic and Science Fund, the China Welfare Association, or the China Charity Association.

Example

An artist has donated welfare assistance to poverty areas through a State organ, using 100,000 yuan derived from the sale of his paintings.

Statutory taxable income = 100,000 yuan − (100,000 yuan × 20%) = 80,000 yuan

Statutory deductible amount = 80,000 yuan × 30% = 24,000 yuan

Actual taxable income = 80,000 yuan − 24,000 yuan = 56,000 yuan

Actual tax payable = 56,000 yuan × 20% = 11,200 yuan

Financial Assistance for Research and Development

Expenses incurred by individuals in the course of granting financial assistance, through nonprofit organizations in China or government organs of China, to non-associated science research institutions and universities, for the research and development of new products, new technology and/or new crafts, may be granted full deductions in the following manner, after examination by the relevant tax department:

  • Where the taxable income comprises wages/salaries: For the following month.
  • Where tax is computed on each payment: At the next instance.
  • Where tax is computed on an annual basis: For the current year.

Foreign Tax Credits

General Guidelines

Individuals who are domiciled in China, or who have no domicile in China but have resided in China for 1 year or longer, shall calculate separately tax payable on income derived from sources within and outside China.

The taxpayers shall be allowed to credit income tax (excluding compensation made to the taxpayers after tax payment, and taxes borne by others) paid abroad to foreign tax administrations on income derived from sources outside China, against their income tax payable in China, within certain prescribed limits.

Credit Limits

The credit limits shall be based on the tax that would be payable on the foreign income if it were computed under China's Individual Income Tax Law.

The limits shall be computed separately for different countries, different regions, and different items. The sum of the various taxes payable on different items from the same country/region shall be the credit limit for that country/region.

Carry Forwards

Where the actual tax paid by a taxpayer in a country/region outside China is less than the credit limit for that country/region as computed under Chinese tax law, the balance should be paid in China.

Where the tax paid abroad exceeds the credit limit for that country/region, it cannot be credited for the current tax year. However, the excess portion may be carried forward to subsequent years (maximum: 5), to offset against the balance of the credit allowable for the same country/region under the same items.

Example

From January to December 2004, Mr Guo earned wages of 500,000 yuan and royalties of 7,000 yuan from country A, and interest income of 10,000 yuan from country B. He paid income tax of 110,000 yuan to country A and 2,500 yuan to country B, in accordance with tax laws. The foreign tax credit limit for Mr Guo is computed in the following manner:

Credit for country A

Tax payable on wages of 500,000 yuan under Chinese tax law

= ({500,000 yuan ÷ 12 − 800 yuan − 3,200 yuan} × 25% − 1,375 yuan) × 12 = 96,500 yuan

Tax payable on royalties of 7,000 yuan under Chinese tax law

= (100,000 yuan − {100,000 yuan × 20%}) × 20% = 16,000 yuan

Credit limit for country A

= 95,600 yuan + 16,000 yuan = 112,500 yuan

Tax to be made up in China

= 112,500 yuan − 110,000 yuan = 2,500 yuan

Credit for country B

Credit limit for country B (tax on interest under Chinese tax law)

= 10,000 yuan × 20% = 2,000 yuan

Mr Guo may apply a credit of 2,000 yuan against the 2,500 yuan in tax paid in country B, in line with the limits discussed above. The balance of 500 yuan may be carried forward to offset the balance of the credit allowable for country B within the subsequent 5 years.

Other Rules

Distinguishing Between Taxable Items

Where it is difficult to draw the line between taxable items for income earned by individuals, the relevant tax department shall make the final determination.

After-Tax Income, Tax Borne by Others

Where taxpayers obtain after-tax income, and the employers or other individuals bear the Individual Income Tax for the taxpayers, the after-tax income should be converted into taxable income on which tax payable shall be computed.

The conversion formulas for the various categories are discussed below:

Wages/Salaries

Taxpayers should use the formula below. For the applicable tax rate, see Table 8.4.

Taxable income = (After-tax income − Standard deduction − Quick deduction) ÷ (1 − Tax rate)

Production/Business Income of Individual Industrial/Commercial Households

Taxpayers should apply the formula used for wages/salaries. However, for the applicable tax rate, see Table 8.5.

Contracting and Leasing Income of Enterprises/Institutions

Taxpayers should apply the formula used for wages/salaries. However, for the applicable tax rate, see Table 8.5.

Table 8.4 Schedule 4 (Wages/salaries)
Grade Tax bracket Tax rate (%) Quick deduction (yuan)
1The portion not over 475 yuan50
2The portion between 475 yuan and 1,825 yuan1025
3The portion between 1,825 yuan and 4,375 yuan15125
4The portion between 4,375 yuan and 16,375 yuan20375
5The portion between 16,375 yuan and 31,375 yuan251,375
6The portion between 31,375 yuan and 45,375 yuan303,375
7The portion between 45,375 yuan and 58,375 yuan356,375
8The portion between 58,375 yuan and 70,375 yuan4010,375
9The portion over 70,375 yuan4515,375
Table 8.5 Schedule 5 (Production/business income of individual industrial/commercial households, contracting/leasing income of enterprises/institutions)
Grade Tax bracket Tax rate (%) Quick deduction (yuan)
1The portion not over 4,750 yuan50
2The portion between 4,750 yuan and 9,250 yuan10250
3The portion between 9,250 yuan and 25,250 yuan201,250
4The portion between 25,250 yuan and 39,250 yuan304,250
5The portion over 39,250 yuan356,750
Table 8.6 Schedule 6 (Remuneration from labor services)
Grade Tax bracket Tax rate (%) Quick deduction (yuan)
1The portion not over 21,000 yuan200
2The portion between 21,000 yuan and 49,500 yuan302,000
3The portion over 49,500 yuan407,000
Remuneration from Labor Services

Taxpayers should use whichever of the formulas below that is appropriate. For the applicable tax rate, see Table 8.6.

Where after-tax income does not exceed 3,360 yuan, the following applies:

Taxable income = (After-tax income − 800 yuan) ÷ 0.8

Where after-tax income exceeds 3,360 yuan, the following applies:

Taxable income = (After-tax income − Quick deduction) × 0.8 ÷ (1 − Tax rate × 0.8)

Example

Mr Zhang, a clerk, received a wage income of 2,000 yuan for this month. His employer bore Individual Income Tax of 95 yuan for him.

Taxable income = (2,000 yuan − 800 yuan − 125 yuan) ÷ (1 − 15%) = 1,264.71 yuan

Tax payable = (1,264.7 yuan × 10%) − 25 yuan = 101.47 yuan

Example

Professor Li earns 3,000 yuan for one lecture. The university bears Individual Income Tax of 440 yuan for him.

Taxable income = (3,000 yuan − 800 yuan) ÷ 0.8 = 2,750 yuan

Tax payable = 2,750 yuan × 20% = 550 yuan

Example

Mr Zhao, an actor, received remuneration of 60,000 yuan for one performance. The performing company bore Individual Income Tax of 12,400 yuan for him.

Taxable income = (60,000 yuan − 7,000 yuan) × 0.8 ÷ (1 − 40% × 0.8) = 62,352.94 yuan

Tax payable = 62,352.94 yuan × 40% − 7,000 yuan = 17,941.18 yuan

Income Shared Between Two or More Individuals

Where income is derived together by two or more individuals, the tax payable should be computed separately for each individual, after separately deducting each individual's expenses in accordance with tax law.

Example

Mr Zhao and Mr Qian collaborate to write a novel and receive a total remuneration of 60,000 yuan. Mr Zhao gets 40,000 yuan; Mr Qian, 20,000 yuan. When computing their income tax payable, Mr Zhao and Mr Qian should each deduct expenses from his own portion of remuneration, and then calculate the statutory tax payable, statutory tax reduction, and actual tax payable:

Tax payable for Mr Zhao

Taxable income = 40,000 yuan − (40,000 yuan × 20%) = 32,000 yuan

Statutory tax payable = 32,000 yuan × 20% = 6,400 yuan

Statutory tax reduction = 6,400 yuan × 30% = 1,920 yuan

Actual tax payable = 6,400 yuan − 1,920 yuan = 4,480 yuan

Tax payable for Mr Qian

Taxable income = 20,000 yuan − (20,000 yuan × 20%) = 16,000 yuan

Statutory tax payable = 16,000 yuan × 20% = 3,200 yuan

Statutory tax reduction = 3,200 yuan × 30% = 960 yuan

Actual tax payable = 3,200 yuan − 960 yuan = 2,240 yuan

Exchange Rate Conversions

For computations of taxable income, all income earned shall be computed in yuan terms.

Personal Income

Personal income received in foreign currency should be converted into yuan at the exchange rate quoted by the People's Bank of China on the last day of the month preceding that in which the tax payment receipt is issued (or at the rate worked out in accordance with the relevant rules).

In the final settlement at the year-end, as stipulated by tax law, the portion of the foreign currency income on which tax has been prepaid on a monthly basis or at each payment instance shall not be converted again.

The balance of the income on which tax should be made up shall be converted into yuan at the exchange rate on the last day of the preceding tax year.

Income in Kind

For the income in kind, the taxable income should be computed according to the price listed in the documents for obtaining the income.

Where there are no vouchers or the price is obviously low, the relevant tax department shall assess the taxable income based on the local market price.

Income in the Form of Securities

Where income is received in the form of securities, the relevant tax department shall assess the taxable income based on the face value of the securities and their market price.

TAX REDUCTIONS AND EXEMPTIONS

Exemptions

Exempt Items

Awards

Where awards for achievements in the following areas are granted by the Provincial People's Governments, Ministries, and Commissions under the State Council, or the People's Liberation Army Units at army level and above, or by foreign or international organizations, the awards may be exempt from tax:

  • Science.
  • Education.
  • Technology.
  • Culture.
  • Public health.
  • Sports and culture.
  • Environmental protection.
Interest

Interest from the following sources may be exempt from tax:

  • Bonds issued by the Ministry of Finance.
  • Financial bonds issued upon approval by the State Council.
  • Educational saving deposits (i.e., earmarked saving deposits for education that are of specified amounts and opened with designated banks, in accordance with State rules).
  • Other earmarked saving deposits, or special fund deposits of a savings nature (currently, these include funds for house reserves, health insurance, basic insurance for the aged, and un-employment insurance), as specified by the finance department of the State Council.
Special Allowances, Subsidies

The following allowances or subsidies may be exempt from tax:

  • Special government allowances paid in accordance with State Council regulations.
  • Allowances or subsidies specified as being tax-exempt by the State Council. These include academician allowances paid to the academics of the China Science Academy and the China Engineering Academy, and allowances paid to senior academics.
Income of Diplomatic Personnel

Income earned by the diplomatic personnel in embassies and consulates in China who are exempt from tax as provided under the relevant State laws.

  • Diplomatic agents (including ambassadors, ministers, charges d'affaires, and other embassy staff with diplomatic titles).
  • Consular officers and other personnel.
Residential Re-Purchases

Exemptions may be granted, as part of efforts to encourage personal lifestyle changes or the buying of houses, to taxpayers who sell their own residential houses and who plan to buy new houses at market prices 1 year after the sale of the old houses.

Whether full or partial exemptions are granted will depend on the value of the houses chosen for re-purchase.

Removal Compensation

Tax may be exempt on removal compensation obtained by individuals in accordance with standards specified under State administrative methods relating to city and town dismantle and removal.

Others

  • Exemptions may be granted for welfare benefits (i.e., poverty alleviation allowances paid out of union funds or welfare reserves drawn by enterprises, institutions, government organs, or social organizations in accordance with the relevant State rules); survivors' pensions; and relief payments (i.e., allowances for life poverty paid by the civil affairs department to individuals).
  • Exemptions may be granted for basic pensions for the aged, basic health insurance, unemployment insurance, and house reserves drawn up to the percentage specified by the State or local governments, and paid to designated financial institutions, by enterprises and individuals.

    The portion in excess of the percentage specified shall be included in the wages/salaries for the current period, and subject to income tax.

    Exemptions may also be granted when individuals receive these payments.

  • Exemptions may be granted for insurance indemnities.
  • Military severance payments and demobilization payments received by members of the armed forces may be exempt from tax.
  • Exemptions may be granted for settlement payments, severance payments, retirement payments, and retirement living allowances received by public servants and workers under State-unified rules.
  • Exemptions shall apply to income stipulated as being exempt from tax under international conventions to which the Chinese Government is a party, or in the agreements it has entered into.
  • Exemptions may be granted for other income upon approval by the finance department of the State Council.

Provisional Exemptions

The following items are temporarily exempt from tax:

  • Income from the transfer of stocks and securities investment funds.
  • Prizes in the form of share rights, such as share or investment percentages awarded to individuals by science research institutes or universities for transforming science and technological achievements.
  • Quantity-based assets whose ownership is transferred to employees in the form of shares when collective enterprises are transformed into equity cooperative enterprises.
  • Prizes of less than 10,000 yuan won for one time by individuals as a result of buying social welfare lottery tickets or sports lottery tickets.
  • Income from the transfer of houses, where the property is the individual's sole house and has been kept for his own use for more than 5 years.
  • Awards received by individuals for disclosing various violations or offenses, and assisting in investigations of these violations or offenses.
  • Commissions received by individuals for withholding taxes.
  • Wages/salaries earned during their extended retirement periods by experts or scholars who have reached retirement age, but who remain at work because of work requirements and who enjoy special government allowances.
  • Wages/salaries earned by experts or scholars during the extension of retirement limits, who are old enough to retire but remain to work for work need and who enjoy the special government allowances.
  • Wages/salaries earned by foreign experts that are exempt from tax in accordance with State regulations (such as workers directly dispatched to China by the World Bank in accordance with World Bank loan agreements, workers directly dispatched by the United Nations to China, the workers dispatched to China by assisting countries for assistance programs, or experts coming to work in China but paid by foreign sources).

Special Instances

Terminated/Retrenched Workers

Certain tax exemptions may be granted for the following items:

  • Lump-sum settlement payments received by employees of enterprises declared bankrupt.
  • Lump-sum payments of compensation received by employees for termination of their work contracts.
  • Business income and remuneration from personal services earned by retrenched workers engaged in community services.
Agriculture

Temporary exemptions may be granted for the following items once the Special Agriculture Tax has been abolished, or where reductions or exemptions have been granted under Agriculture Tax or Animal Husbandry Tax:

  • Income of farmers from agricultural specialties.
  • Income from plantations, breeding, feeding, and fisheries.
  • Income from sales of self-produced agricultural products.
Compensation for Infringements

Under the Compensation Law of the State, exemption shall be granted for compensation received by victims where it arises from the infringement of the legal rights or interests of citizens by government organs or their employees who misuse their power.

Reductions

Needy Individuals

Tax may be reduced in the following cases upon approval by the People's Government at the provincial level, which shall determine the ranges and time limits to be applied:

  • Where income is earned by disabled persons, unsupported aged persons, or members of martyr's families. This is limited to wages/salaries, the production/business income of individual industrial/commercial households, the contracting/leasing income of enterprises/institutions, remuneration for personal services, author's remunerations, and royalties.
  • Where individuals suffer heavy losses caused by major natural disasters.
  • Other cases as approved by the finance department of the State Council.

Enterprises with Participation by Needy Individuals

Reductions may be granted for production/business income derived by single proprietorships/partnerships that disabled persons have invested or participated in, where conditions for such reductions as stipulated by the People's Government in the relevant jurisdictions at the provincial level have been met, after the relevant tax authorities have approved the applications for reduction.

The scope and range of such reductions shall be in accordance with those specified by the People's Government in the relevant jurisdictions at the provincial level.

House Rental

Income earned from house renting by individuals shall be temporarily taxed at 10%.

TIME LIMIT AND PLACE FOR TAX PAYMENT

General Guidelines

Where taxpayers file tax returns by themselves, the tax already withheld in China may be deducted from the tax payable in accordance with the relevant regulations.

Direct Reporting and Payment

In the following instances, taxpayers should themselves report and pay tax on income to the relevant local tax offices in the locales where they receive the income:

  • Where taxpayers receive wages/salaries from two or more payers.
  • Where taxpayers have no withholding agents.
  • Where taxpayers have withholding agents but these agents fail to withhold tax in accordance with the rules.
  • Where income from service remunerations, author's remunerations, royalties, or property leasing is received in several payments though only one transaction is involved.

    In such cases, tax on income received from outside China should be reported and paid to the relevant tax offices in the locales where the taxpayers have made family registration or where the taxpayers reside on a regular basis.

Withholding Agents

The income-paying units or individuals shall be the withholding agents for withholding Individual Income Tax.

Issuing of Certificates

When withholding the tax, the withholding agents should issue to the taxpayers the standard tax-withholding certificates printed by the tax department.

Where it is not possible to issue certificates because of the massive number of taxpayers involved, tax withholding agents for income from wages/salaries or income from interest, dividends, or bonuses need not issue certificates, once they have obtained approval from the relevant tax department.

However, they should notify in a certain way to the taxpayers of the income tax withheld.

Special Instances

Workers Dispatched Abroad

Where taxpayers are employed by enterprises or other economic organizations in China, or by the People's Government, and dispatched to work abroad, the dispatching units in China shall be the withholding agents if their income is paid or borne by the dispatching units in China.

Choosing a Place for Payment

Taxpayers receiving income from abroad, or from two or more sources in China, may choose one place for reporting and payment. Any change in place should be approved by the relevant tax offices in the previous reporting place.

Foreigners who are working temporarily in China or who provide services in several places should abide by the time limits for reporting and payment specified by tax law, and pay the tax locally at the places where they receive their income. They may also fix one place for tax reporting and paying.

Prepayments and Tax Returns

The tax withheld by the withholding agents on a monthly basis, and the tax payable by self-reporting individuals, should be paid to the State Treasury within the first 7 days of the following month. The tax returns should be submitted to the relevant local tax offices at the same time.

Wages/Salaries

Tax on wages/salaries is computed and paid on a monthly basis. The withholding agents or the taxpayers should remit the tax to the State Treasury within the first 7 days of the month following the one the wages are received, and submit the tax returns to the local tax offices.

Tax payable for some specified industries (e.g., industries where monthly wages/salaries fluctuate due to changes in production volume or seasonal reasons, such as the digging industry, the ocean-going shipment industry or the ocean-going fishery industry) may be computed on an annual basis and prepaid in monthly installments in accordance with the relevant State regulations. A final settlement shall be made at the year-end, at which time the excess shall be rebated or the deficiency made up.

Industrial/Commercial Households

Tax payable on the production/business income of individual households that keep sound accounting records shall be computed on an annual basis and prepaid by the taxpayers on a monthly basis within the first 7 days of the month following the one the wages are received. A final settlement shall be made within 3 months of the end of the tax year, at which time the excess shall be rebated or the deficiency made up.

Individual households under the self-reporting collection mode may lodge tax returns by mail, upon approval by the relevant tax authorities. The date of the postmark on which the return is sent shall be the effective date of the return.

Where individual households have not kept complete accounting records, the tax payment mode shall be determined by the relevant local tax offices in accordance with the tax law. At present, pre-assessed tax on a regular basis is a popular mode.

Contracted/Leased Operations

Tax payable on the income of enterprises/institutions from contracted/leased operations shall be computed on an annual basis and paid to the State Treasury within 30 days of the end of each tax year. The tax returns shall be filed with the relevant local tax offices at the same time.

For income received in several payments during 1 year, tax should be prepaid within 7 days of the receipt of each payment. A final settlement shall be made at the year-end. Any excess shall be refunded or deficiency made good within 3 months of the year-end.

Single Proprietorships, Partnerships

Tax payable by single proprietorships/partnerships is computed on an annual basis and prepaid on a monthly or quarterly basis. The investors should prepay the tax within 7 days of the end of the month or quarter. A final settlement shall be made. Any excess shall be refunded or deficiency made good within 3 months of the year-end.

Where the enterprises undergo mergers, restructure, or termination at some point during the year, the investors should complete the final tax settlement with the relevant tax authorities within 60 days of the termination of production/business operations.

The investors of single proprietorships/partnerships should report and pay Individual Income Tax to the relevant local tax authorities in the locales of their actual management. For production/business income received by the investors from partnerships, the partnerships should report and pay the Individual Income Tax payable by the investors to the relevant local tax authorities in the locales of their actual management and file a copy of the tax return with the investors.

Investment in Two or More Enterprises

Where investors invest in two or more enterprises, they should report and pay Individual Income Tax to the relevant local tax authorities.

When reporting and paying Individual Income Tax to the relevant local tax authorities in the location of their actual management, the investors should note down the annual taxable income received from other enterprises. For enterprises of a partnership nature, the investors should submit the Consolidated Return of Individual Income Tax for Investors of Partnerships, which consolidates the income earned from all the enterprises. They should enclose at the same time all the annual final accounting statements of the enterprises and the tax payment certificates for the year.

The final settlement at the year-end shall be handled in two ways, depending on the circumstances described below.

All Single Proprietorships

Where the enterprises are all individual single proprietorships, the investors should report and pay tax separately for each enterprise to the relevant local tax authorities.

The applicable tax rate shall be determined based on the total income of all enterprises. Tax payable shall be computed and the final settlement made based on the business income of each enterprise.

The investors should first consolidate the business income of all the enterprises to obtain the taxable income. Once the applicable tax rate for the taxable income has been determined, they should compute the tax payable on all the business income. Then, they should compute the tax payable and the tax to be made up for each enterprise separately, based on the income contribution made by each enterprise to the total business income.

Taxable income = Total business income of all enterprises

Tax payable = Taxable income × Tax rate − Quick deduction

Tax payable by a particular enterprise = All tax payable × Business income of this enterprise ÷ Total business income of all enterprises

Tax to be made up by a particular enterprise = Tax payable by this enterprise − Tax prepaid by this enterprise

Mixed Enterprises

Where some enterprises are of a partnership nature, the investors should report and pay tax, and make final settlement with the relevant local tax authorities in the locale where they frequently reside. Where this locale differs from the locale where the enterprises are managed, the investors should choose the locale of one partnership participated in by the investors as the locale for final settlement. No change in locale will be allowed for 5 years.

When prepaying Individual Income Tax, the investors should submit to the relevant tax authorities the Return for Individual Income Tax on Individual Single Proprietorships and Partnerships, enclosing it with the accounting statements.

Within 30 days of the year-end, the investors should submit to the relevant tax authorities the Return for Individual Income Tax on Individual Single Proprietorships and Partnerships, enclosing it with the annual final accounting statements and tax prepayment certificates.

Income from Outside China

Taxpayers receiving income from sources both inside and outside China should report and pay tax separately on the two types of income.

Where taxpayers derive income from outside China, and where they are obliged to report and pay tax by themselves, they should report and pay tax to the relevant tax department in China within 30 days of the end of each tax year.

Where they have difficulty abiding by this rule because the country from which their foreign income is derived has a different tax year, they may report and pay tax to the relevant tax department in China within 30 days of the end of that country's tax year and settlement of tax in that country, once approval has been granted by the relevant tax department of China.

Where taxpayers are unable to report and pay tax within the time limit, they should entrust other people to carry out the reporting and payment, or file returns and pay tax by mail.

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Individual Income Tax

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