Tax Clarification on Director’s Fees, 13 Month Salaries

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Sept. 8 – The State Administration of Tax (SAT) issued Circular 121, clarifying four areas of individual income tax policy (IIT) namely director’s fees, 13 month salaries, criteria for recognition as a Chinese national residing overseas, and property splits associated with divorce. These are as follows:

Director’s fees
Director’s fees should be taxed under individual income tax as labor services and under certain conditions may result in a lower tax liability. Following the circular, the SAT says that fees paid to a director should be taxed under wages or salary if the director is an employee of the company or a related party. If the director is not an employee, the director’s fees can still be taxed under the labor services category.

There are issues here as regards stock option plans, stock appreciation rights and restricted stock. Individuals who receive these are subject to Circular 461, clarifying stock options in previous Circulars 35 and 5. We recommend professional advice is taken concerning these issues if applicable.

13-month salaries
Previously, 13-month salaries could be taxed as a separate month without deductions. Circular 121 invalidates this treatment. This could mean that the 13th month salary should be combined with the normal 12th month salary and possibly resulting in a higher tax rate.

Local practice may vary as to this treatment. Companies should confirm the intended treatment of this with their local tax bureau for clarification.

Overseas Chinese
Overseas Chinese may now enjoy a higher rate of individual monthly income tax deduction pegged at a RMB4,800 ceiling instead of the statutory deduction of RMB2,800. However, they must fulfill the following criteria:

a) Have obtained the right of abode in a foreign country and have resided there permanently for two years consecutively, within a minimum stay during that period of 18 months;

b) Have not obtained the right of abode, but have been granted permission to stay in an overseas country for 5 years or more, and have physically resided in that country for a minimum of 30 months during that five year period.

c) Chinese citizens studying overseas do not qualify as overseas Chinese for IIT purposes.

Division of property following divorce
Circular 121 states that the transfer of real estate title following a divorce property split will not be subject to IIT. However, if the property is subsequently sold, IIT will be levied on the difference between the proceeds of the sale and the original purchase price of the real estate.

Those needing assistance with IIT issues can email Sabrina Zhang, national tax partner for Dezan Shira & Associates at