China’s new Individual Income Tax(IIT) law has come into effect this year. Considering it takes a tougher stand on foreigners and high-end talents for tax payment, we would like to share insights and help understand how foreign individuals can get the most out of the new tax exemption system.
First of all, you should know that for foreigners, there is a 3-year transitional period for getting used to the changes from the old tax exemption system to the new one. That means foreign individuals can choose a tax exemption based on either the old system or the new one.
Old Tax Exemption System
Based on the old ax exemption system, inbound foreign employees who would like to enjoy tax exemptions should file their application by themselves or via withholding agents with the in-charge tax authorities. No tax exemptions will be granted without having completed their tax registration form. There are eight items needed to qualify for tax exemptions:
8 non-taxable allowances: Travel allowances.
8 non-taxable allowances: Housing allowance, meal allowances, moving expense, and laundry expenses received in non-cash form or on a reimbursement basis.
8 non-taxable allowances: Home leave expenses.
8 non-taxable allowances: Language training expenses and children education expenses.
Tax exemption for dividends.
Tax exemption for salaries and wages of foreign experts.
Tax deferral for the stock incentive of non-listed companies.
Tax deferral for stock incentives of listed companies.
To apply for the above deductions, foreigners should also submit:
<Tax Reduction/ Exemption Registration Form for Taxpayers>
Identity certification of taxpayers
Other supporting documents
New Tax Exemption System
Under the new IIT, foreigners working in China and resident employees will be subject to the new allowed deductions, including:
Child education expenses
Health care cost
Interest on housing loan
There are still many arguments and complex calculations under the new tax exemption system. For instance, you can claim more exemptions on housing rent with your girlfriend rather than your wife, because they differentiate spouses from individuals.
To some extent, they also simplify the documentation needed for tax exemption. A fapiao is no longer required for the application as long as you have the rental contract. Let's study more from the new tax exemption system.
Child Education Expenses
Taxpayers whose children receive a full-time education and pre-school education.
Pre-school education: children between the age of 3 and that required for pre-primary school, generally referring to kindergarten and preschool.
Full-time academic education: including full-time education in primary school, middle school, high school (secondary, technical), university (college), postgraduate, doctoral, etc.
Each child can help you get a fixed amount of RMB 1,000 of tax exemption per month.
Parents can choose to deduct RMB 500 of taxes from each person or a total of RMB 1,000 on a person.
Pre-school education: from the month when the child reaches 3 years old to the first month before primary school enrollment.
Full-time education: children receive full-time education from the month of enrollment to the end of the education.
Note: If your child drops out of school because of illness or other non-subjective reasons, but retains his or her student status, you can still enjoy the benefits of tax exemptions.
If you are receiving education in China, you do not need to keep specific documents; if you are receiving education abroad, you need to keep the relevant education materials such as admission’s offer and student visa from schools located overseas.
Further self-education is divided into two situations:
1. You are receiving academic (degree) education, such as undergraduate, part-time postgraduate, etc.
2. You are accepting further self-education for certifications (Chinese qualifications only), and the relevant certificates have been obtained during the tax year. There is a specific catalog that details which types of qualifications are included.)
Further self-education for a degree (diploma): a monthly deduction of RMB 400, the maximum length of education for the same degree does not exceed 48 months.
Further self-education for vocational qualifications: deducting RMB 3,600 in the year during which the relevant certificates were obtained.
Further self-education for degrees (diplomas): from the month of enrollment to the month the education program is finished.
Further self-education for vocational qualifications: According to the date of the certificate issued; for example, if the certificate was obtained in 2019, the relevant tax will be deducted from 2019.
Note: The certificate of further self-education for vocational qualifications must be acquired after January 1, 2019.
Health Care Cost
In a tax year, you must have accumulated a burden of more than RMB 15,000 after deducting medical insurance reimbursements.
RMB 80,000 maximum annually. For adults, you can choose to deduct the tax from yourself or your spouse. For children, deducted tax from parents.
The original (or photocopy) of medical service charges and related documents proving past medical insurance reimbursements.
Interest on Housing Loans
Individuals or spouses, using housing loans alone or in combination to buy a house in China. Tax can be deducted from the interest on housing loans of the first property they buy.
RMB1000 each month. If you have a spouse, you can choose to deduct the tax from either yourself, your spouse, or to deduct equally among yourselves. But once you've confirmed it, you can't change it until the next tax year!
The loan contract stipulates the month from the start of repayment to the month when the loan is repaid or when the contract ends, but the maximum period should not exceed 240 months - that is, 20 years.
Housing loan contract, loan repayment receipt.
The deduction for housing rent needs to meet two conditions:
1. You and your spouse (if applicable) do not own a home in the city where you work.
2. You and your spouse (if applicable) have not enjoyed any interest on housing loan deductions in the same tax year.
In other words, you can either choose a deduction for housing rent or a deduction from the interest on housing loans in the same tax year.
There are three categories within this deduction scheme:
Municipalities, provincial capitals and special grant cities offer deductions of a fixed amount of RMB 1,500 per month. Such municipalities are: Guangzhou, Beijing, Shenzhen and Shanghai.
If the population of a city counts more than 1 million people, the monthly fixed amount for a deduction is RMB 1,100. If the registered population does not exceed 1 million, the monthly fixed amount for a deduction is RMB 800.
Note: If you and your spouse live in the same city, the tax can only be deducted from the person who signed the rental housing contract. If you and your spouse live in different cities and did not buy a house in either of those cities, you can both claim a tax deduction according to the prescribed standards.
The month from the beginning of the lease contract to the end of the lease term. If the contract is terminated early, the current month of the actual termination of the lease contract shall prevail.
Parents, stepparents, adoptive parents, or grandparents if neither of them is under 60 years old.
For an only child, a monthly fixed amount of RMB 2,000 deduction.
If you are not the only child, you need to share the RMB 2,000 monthly deduction with your sibling(s), but the amount for each person cannot exceed RMB1,000 per month.
Note: a written agreement is required for the allocation. Once the agreement has been confirmed, it cannot be changed until the next tax year.
The month when the elder reaches 60 years old until the end of the obligation.
If you are not the only child, you need to keep relevant written agreements for the allocation.
How to Apply for Tax Exemption?
The Chinese government does put more responsibility on individuals under the new IIT system. Individuals are not only required to fill out their tax returns annually but also have to calculate and submit their tax exemption application by themselves.
In this regard, the individual taxpayer no longer needs to share their private information with the company to apply for tax exemption, as everyone directly reports their taxes to national tax authorities via the country's official mobile app.
Well, every coin has two sides; in this case, so even though you no longer need to share your private information, your data is still collected by the government through their own app!
The only official APP for filling tax returns and applying for tax exemptions is the one shown below
What Do You Think of the New Tax Exemption System?
As we mentioned, there is a 3-year transitional period for getting used to the changes from the old tax exemption system to the new one for foreign individuals. You can try to calculate your tax exemption by yourself under the new tax exemption system, and see which of the two benefits you the most.
If you still get confused, here are a few examples:
A foreigner stays in China＞183 days
He/She is a tax resident in China.
With parents in his home country. Dad＞ 60, Mum ＞55
If he or she is the only child, he or she can get a monthly fixed deducted amount of RMB2,000. If he or she is not the only child, he or she needs to make an agreement for the allocated amount with other siblings.
With the son studying for his PhD in his home country; daughter aged 17 graduating from high school and keeping her student's status despite not studying at the moment; youngest son in Guangzhou will be 3 years old in March 2019.
He can get RMB 1,000 tax exemption on each child per month or RMB 3,000 in total.
Divorced and now living together with a girlfriend in Guangzhou - the rental agreement bears both names.
The couple gets a maximum of tax exemption of RMB 3,000 on housing rent in Guangzhou (only RMB 1,500 for spouses).
A person gets sick and pays RMB 18,000 in 2019 for medical expenses.
That person can get RMB 8,000 in tax exemption on health care cost for relevant medical expenses recorded in 2019.
He studied for his undergraduate and graduate program in China from 2019 to 2025 and paid RMB 30,000 per annum; he studied a part-time Bachelor degree in psychology from 2025 to 2030 for which he received a scholarship.
He can get a monthly fixed amount of RMB 400 tax exemption on further self-education.
He passed the Association of Chartered Certified Accountants (ACCA) exam in 2019.
He won't receive any tax exemption on his ACCA qualification, as it is not a Chinese qualification