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How the Individual Income Tax Reform will affect foreign taxpayers in China.

For all those curious ones who missed our lunch talk event on 'Individual Income Tax Reform', we took the chance to talk to tax expert Iris Wang, Tax Manager at Ecovis Beijing, to ask her about the 3 main implications of the new IIT reform for foreign taxpayers in China.

Do I have to pay income tax in China on my worldwide income after the reform?

"The answer is yes and no – according to the new Individual Income Tax Law, your worldwide income becomes taxable in China when you spend more than 183 days in a year in China and are considered a tax resident.

But the good news is: The regulations grant an exemption for foreign-sourced income you receive outside of China (and not derived from China!), at least for six consecutive years of tax residency."

So I heard there is a new tax calculation method – what does that mean for my monthly pay slip?

"If you receive a regular monthly salary, your net pay will most likely be lower in December than in January. Let me explain why: Your income is looked at accumulatively for the taxation.

Take your January salary (minus applicable deductions) and compare it against the tax table. The following month, your accumulated January plus February salary is compared against the tax table and you might end up in a higher tax bracket already. And this goes on – so at the beginning of the year, you might be taxed with only 3%, but with 20%, 25% or 30% at the end of the year. Please keep in mind, in reality the calculation is more complicated. But you get the general idea now…"

And what about these newly introduced special deductions? Can I benefit from those?

"Yes, you can choose to apply for these new special deductions just like Chinese taxpayers. But for a transition period of three years, foreign taxpayers can choose between the non-taxable items for foreign taxpayers (the old policy) and the new deductions. In many cases, the old policy will be more beneficial for foreigners, especially if they receive a housing allowance or send their children to a private international school in China. From 2022, the old policy will not be applicable anymore."

Thanks again Iris and Ecovis team! 

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