China Amends the Individual Income Tax Law

1. The reformation of IIT reducing the tax of middle- and low-income people

It mainly includes the following four items:

• The standard of salary and wage income deduction has been raised. From the original RMB3,500 tax exemption increased to RMB5,000 per month.
• The structure of salary and wage income tax rate has been adjusted.

        Original IIT Law

        New IIT Law

• The income tax rate of individual industrial, commercial households, contracted tenants, sole proprietors and partnerships have been adjust correspondingly. That is to maintain the level 5 tax rate unchanged, the five-level level has been expanded accordingly, such as the first level of the distance from the annual taxable income of RMB5,000 to less than RMB15,000, the fifth level will be expanded from the annual taxable income of RMB50,000 to more than RMB100,000.

• The time limit for filing tax payment has been extended. The amendment extend the tax payment period for personal income tax from the original 7 days to the 15th day, which is consistent with the reporting and payment time of other major taxes, so that taxpayers and withholding agents can go to the tax authorities to collect taxes, reducing their transactional burden.

2. The tax resident status has been redefined

The new IIT Law has redefined the tax residents. Any individual who has a domicile within the territory of China or who has no domicile but has stayed within the territory of China for an aggregate of 183 days or longer in a single tax year is considered as a resident individual. Under the CRS rules, A high-net-worth Chinese tax resident individual’s relevant overseas financial account information also needs to be exchanged to the Chinese tax authorities.

3. Anti-avoidance clause has been added

The new IIT Law has added anti-avoidance clause, and the second section has introduced the “controlled foreign enterprise” rule. An offshore company is regarded as a controlled foreign enterprise. For an enterprise controlled by a resident individual, a company established in a country or region with a significantly lower actual tax burden has no reasonable operational needs, and does not allocate or reduce the distribution of profits that should be attributed to the individual resident. The tax authorities have the right to make tax adjustments in accordance with reasonable methods, as if the enterprise had distributed individual residents and collected personal income tax (20%).

In this case, when setting up an offshore trust, we need to pay attention to avoid BVI company being identified as a controlled foreign company. As according to the new law, if a Chinese resident individual (the Settlor) have strong control over the board of directors, it may cause the company to become a “controlled foreign enterprise.” Until now the definition of “control” is not clear on the IIT Law. The Corporate Income Tax Law defined as a single resident individual holds more than 10% of the voting shares and these resident individuals collectively hold more than 50% of the shares of the foreign enterprise or the above criteria were not met, but the foreign companies were in substantial control over funds, operations, purchases and sales. To prevent risks, we do not recommend the Settlor act as an independent director in the BVI Company.

4. Tax filing mechanism before immigration has been added

Articles 10 and 13 of the new Law added “abandon declaration” rules. Chinese individuals are required to settle and pay off the previously unpaid portion (if any) before canceling the household registration. At present, there are no specific regulations on how to carry out, but the liquidation itself may involve asset information to the government authorities.

For more information and any assistance, please contact Phoebe Luo, Manager of Zetland Shanghai office at shanghai@zetland.biz or +86 21 6427 2930.