China to Cancel Preferential IIT Policy for Foreigners

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Feb. 14 – To resolve income discrepancies in China, the State Council recently released opinions on deepening income distribution reform (Guofa [2013] No.6, hereinafter referred to as the “Opinions”). One of the goals laid out in the Opinions is strengthening tax collection on high incomes and improving the tax system, including cancellation of the preferential tax policy that exempted dividend and bonus incomes received by foreign individuals from individual income tax (IIT).

This preferential policy was originally enacted under the “Policy Issues Regarding Individual Income Tax (Caishuizi [1994] No. 020)” released by the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) in 1994. Pursuant to the issuance of the Opinions, the MoF and the SAT are expected to draw up regulations in the upcoming months subjecting foreigners to the regular 20 percent IIT rate on income derived from investment in foreign-invested enterprises (FIEs) in China.

The latest guideline also lays out other means that will be utilized to achieve the goal of diminishing income discrepancies in China, including:

  • Utilizing greater government spending and relevant policies to increase and protect the income of the general public. The ultimate goal is to create a fair and efficient income distribution mechanism in order to ensure social justice and stability.
  • Adjusting the income level of low income workers by raising the minimum wage of most areas in China to above 40 percent the average salary of local employees by 2015.
  • Requiring state-owned companies to submit an additional 5 percent of profits to the central government, part of which would be used to support China’s social security system.
  • Enacting strict salary controls over senior executives, including placing caps on the salary level for senior executives of state-owned companies nominated by the government, in order to reduce income differences within companies.
  • Curbing corruption and other illegal activities through greater administration of the incomes of government officials, and by enhancing transparency in property ownership.

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