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Tax Connect Flash | China tax regulation update

Individual Income Tax (“IIT”) Law amended

Circular Number: President’s Decree [2011] No. 48 
Issuance Date: 2011-6-30 
Effective Date: 2011-9-1

The main changes are as follows:

  • The monthly standard deduction for Chinese nationals is increased from RMB 2,000 to RMB 3,500. According to the Implementing Rules of the IIT Law, expatriates are entitled to an additional monthly deduction of RMB 2,800. It is not clear whether such additional deduction standard will also be adjusted.
  • The tax rate table for employment income has been changed. The old and new tax tables are as follows:

Old Tax Rates

New Tax Rates

Monthly taxable income (RMB)

Tax rate

Monthly taxable income (RMB)

Tax rate

<500

5%

<1,500

3%

500-2,000

10%

1,500-4,500

10%

2,000-5,000

15%

4,500-9,000

20%

5,000-20,000

20%

9,000-35,000

25%

20,000-40,000

25%

35,000-55,000

30%

40,000-60,000

30%

55,000-80,000

35%

60,000-80,000

35%

>80,000

45%

80,000-100,000

40%

>100,000

45%

  • The monthly IIT declaration deadline has been extended from the 7th to the 15th of the following month;
  • Overall, the reform will bring benefits to low salary earners (monthly salary below RMB 38,600 after deduction of statutory social security contribution) with a maximum tax reduction of RMB 480 per month. Individuals earning higher salaries will need to pay more tax with a maximum tax increase of RMB 1,195 per month.

In the mean time, the Implementing Rules of the IIT Law are also being amended and may soon be published.

New Double Taxation Treaty between China and UK

Circular Number: Sino-UK DTT 
Issuance Date: 2011-6-27 
Effective Date: The new DTT will come into force once both countries have completed their respective legislative procedures

The UK and PRC signed a new comprehensive Double Taxation Agreement (DTA) in London on 27 June 2011 during the visit of Chinese Premier Wen Jiabao. On this topic, CMS has recently issued a Tax Connect Flash.

Individual Income Tax (“IIT”) for foreign individuals on dividends from Chinese companies listed in the HK Stock Exchange

Circular Number: Tax Circular Guoshuihan [2011] No. 348 
Issuance Date: 2011-6-28 
Effetive Date: 2011-1-4

This Circular clarified some IIT issues connected with dividends received by an expatriate from Chinese companies listed on the HK Stock Exchange. According to the Circular, the company shall withhold 10% IIT unless:

  • the expatriate is not from a treaty country (in such case the IIT rate shall be 20%); or
  • the relevant DTT provides a rate lower than 10% (in such case, the company can apply for the lower rate on behalf of the expatriate shareholder);
  • he relevant DTT provides a rate higher than 10% (in such case, the higher treaty rate shall be used).

The above rules apply to Chinese companies listed in HK which are not foreign invested enterprises (“FIEs”). This implies that dividends distributed by an FIE to its foreign individual shareholders shall still be tax exempted (based on the Tax Circular Caishuizi [1994] No. 20).