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China is continuing to reform its Individual Income Tax (IIT) regime. After recently revising its Individual Income Tax Law, China has released several more rules to reshape the IIT regime in China. These rules include the new Implementing Regulations for Individual Income Tax Law (the Implementing Regulations), additional special deduction rules (Guo Fa [2018] No. 41 and SAT Bulletin [2018] No. 60), tax withholding rules (SAT Bulletin [2018] No. 56 and SAT Bulletin [2018] No. 61), self-filing rules (SAT Bulletin [2018] No. 62) and transitional rules for IIT incentives (Cai Shui [2018] No. 164). These new rules are effective from 1 January 2019.

These new rules:

  • adjust the "6-year rule" under the tax resident concept making it possible for expatriates working in China who qualify as Chinese tax residents to still avoid PRC IIT on their worldwide income
  • introduce for Chinese resident taxpayers a set of additional special deductions, which expatriates working in China can choose to enjoy instead of the currently available tax-exempted allowances for expatriates
  • clarify preferential tax treatments for IIT incentives during transition periods to solve uncertainties taxpayers may encounter under the new IIT regime
  • introduce the accumulative IIT withholding method for withholding agents to withhold resident taxpayers' salary and wages income
  • revise the anti-avoidance rule but high-net-worth individuals still need to pay attention to follow-up rules
  • delete the controversial "deemed sales rule" in the draft Implementing Regulations

In this alert, we will introduce the important changes to the old IIT regime and discuss their implications for both employers and employees. Please feel free to share the alert with your colleagues who might also be interested in the topics raised in this newsletter.

If you have any questions on the topics covered or need further clarification on any particular issue, please do not hesitate to get in touch with your usual contact at Baker McKenzie FenXun, or any of the lawyers listed below.

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