Filing annual individual income tax returns in China

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By Smile Yu/Dezan Shira & Associates 

BEIJING, Jan. 2 – Early in 2008, expatriate employees in China with annual incomes in excess of RMB120,000 (about US$16,200) should complete an annual self-declaration to be submitted by the end of March – at the latest – for their income earned in the 2007 tax year. This annual self-declaration means such expatriates should complete and submit an Individual Income Tax Declaration Form to the local tax authority in addition to their regular routine monthly tax filings.

The following is a brief introduction to individual income taxes in China. It is excerpted from the January/February 2008 issue of China Briefing. The complete issue can be found here.

Who is subject to annual self-declaration?
In accordance with The Implementing Rules of the Individual Income Tax Law of the People’s Republic of China and The Self-declaration Rules Concerning Individual Income Tax, taxpayers who meet one the following five conditions should file self-declarations of individual income taxes.

1) An annual income of more than RMB120,000
2) Income derived from two or more places inside the People’s Republic of China
3) Income derived partly or fully from sources outside the People’s Republic of China
4) Have received taxable income but not paid tax
5) Other conditions regulated by the State Council

What information should be included in the individual income tax declaration form?
For individuals with an annual income in excess of RMB120,000, when reporting their income taxes after the end of the tax year, they should provide the following basic personal information: name, ID type and number, profession, employer, place of residence, address in China, post code and telephone number, as well as tax data such as the annual amount of any different sourced incomes, taxes payable, taxes prepaid and withheld, foreign tax credit and taxes owed or overpaid. In addition, foreigners should declare their nationality and date of arrival in China.

What income should be included in the individual income tax declaration form?
According to the implementation and self-declaration rules, an annual income of over RMB120,000 means an individual person has earned a total income of over RMB120,000 in the following categories: wages and salaries, income from production or business operation conducted by self-employed industrial and commercial households, income from contracted or leased operation of enterprises or social service providers partly or wholly funded by state assets, remuneration for providing services, author’s remuneration, royalties, interest dividends and bonuses, income from lease of property, income from transfer of property, incidental income and other income.

On calculating annual incomes of RMB120,000, income exempted from tax and amounts allowed to be deducted before tax payment should not be calculated as part of the annual income.

Incomes exempted from tax and those allowed to be deducted before tax payment fall into the following three categories:

First, income sourced externally from China may be tax exempted in accordance with The Implementing Rules of the Individual Income Tax Law of the People’s Republic of China (note, this does not apply if your salary is part paid in China and part overseas, under such circumstances the complete salary must be declared).

Secondly, basic endowment insurance, government-regulated basic medical insurance, unemployment insurance and housing funds paid by the taxable individual’s working units and taxable individual himself may be tax exempt.

Thirdly, the following incomes will be also exempt from tax:

  • monetary awards to an individual by provincial governments ministries or commissions of the State Council of the People’s Liberation Army at corps’ level or above, or a foreign or international organization concerned with education, technology, culture, hygiene, sports, environmental protection, or similar issues
  • interest on government bonds, or finance bonds issued by the government
  • for the purposes of Article 13 of the Tax Law, subsidies and allowances paid in accordance with uniform regulations of the State shall mean special government subsidies, academician and senior academician subsidies issued in accordance with State Council regulations and allowances and subsidies that are exempt from individual income tax by State Council regulations
  • welfare benefits, survivors pensions and relief payments
  • insurance indemnification payments
  • military severance pay and demobilization pay for officers and soldiers of the armed forces
  • relocation allowances, employment severance pay, retirement pensions and living expense subsidies for cadres and workers in accordance with the government regulations income of diplomatic representatives, consuls, and other personnel of foreign embassies and consulates
  • income exempted from tax as stipulated in the international conventions to which the Chinese government is a party and in agreements it has signed
  • gains on stock and property transactions to be reported but not taxed